You don’t want to lose it.
For any nonprofit organization, the path to gaining a 501(c)(3) status is difficult, whether it was last year or last century.
It’s important to do everything you can to hang on to that tax-exempt status, for reasons from funding to operations to, well, taxes.
Here, we’ll walk you through how to protect your nonprofit status.
Rules to Maintain Your Status
To continue to be exempt from taxes you have to manage or avoid certain activities to protect your nonprofit status.
- No operations for the benefit of any private interests. This means a staff member, family member, or other person connected with the organization cannot receive any financial or other benefit (aside from an earned salary and insurance benefits).
- No devoting a “substantial part” of activities to influencing legislation. Nonprofits can still engage in lobbying activities, but it can’t be at too high a level of your time or operations and take up a substantial portion of the energy and resources of the nonprofit.
- No participation in any political campaign for or against any candidates running for public office.
- No generating large amounts of income from an unrelated business. If you have a related parallel service or some other sort of business activities generating a large amount of income, but it’s not related to the purpose of the nonprofit, this can exempt you from nonprofit status.
- No conducting activities of an illegal nature or violating public policies.
- You must file an annual tax return. Previously, nonprofits with gross receipts less than $50,000 were exempt from filing their taxes via Form 990, but that exemption no longer exists.
- You must notify the IRS if your mission and purpose significantly changes.
If you engage in any of the first four activities or neglect to file an annual tax return, the consequences can be dire. They include:
- You will no longer be exempt from taxes and will have to pay corporate income taxes on annual profits from now on.
- You might be subject to back taxes and penalties to the effective date the tax-exempt status was revoked.
- Any state tax exemptions, from property, sales, or other taxes, might also be revoked.
- Removal from the IRS Publication 78, the official list or nonprofit organizations that can receive tax-deductible donations, which means donors will no longer be able to receive a tax deduction for any gifts if they gave them after that date of revocation
- Losing chances of receiving grants from private foundations as most have a nonprofit, tax-exempt status as a requirement to receive a grant.