5 Tips to Prepare for Tax Season All Year as a Nonprofit

If you’re a part of a 501(C) classified organization (likely a 501(C)(3)), your nonprofit is more than likely considered tax-exempt by the IRS. Congratulations! You may dread tax season as an individual, but with the right preemptive steps, you don’t have to worry about paying large sums of money to the government.  Your nonprofit is granted this specialized IRS code because you raise money to be recycled back into the nonprofit activities rather than to become profitable. Your goal is to accomplish a mission rather than make money, a charitable mindset that the government incentivizes with the exemption status. 

However, this doesn’t mean your organization will get off scot-free during tax season. Because you rely on member dues, donations, and sponsorships that supporters generously give, you must record the funding that you’ve received and report to the government to prove that you’ve been using it responsibly. 
You see, the government doesn’t necessarily like organizations to be tax-exempt. It means they’ll have less money in their pockets at the end of the day. So if they’re going to let organizations not pay taxes, they want to make sure these organizations deserve such a privilege.

This is why they require nonprofits to file an annual Form 990

While you only file your annual Form 990, make sure it’s easy to collect all of the information you need to effectively and efficiently prepare the documents. Preparation is key to a smooth tax season. That’s why we’ll go over a few tips you need to prepare your nonprofit organization for tax season. We’ll cover: 

  1. An overview of your tax season. 
  2. Strategies to keep your financial data organized. 
  3. Reviewing your bookkeeping system.
  4. The rules you should pay attention to. 
  5. Additional benefits you’ll see by filing your 990. 

Of course, the easiest course of action for your nonprofit is to hire an accountant to help you file your tax forms each year. However, you should still try to stay organized for the sake of making their jobs easier and to keep all of your nonprofit’s records in order. 

Let’s dive in to learn more about tax season and how to make it easier for your organization.

1. Overview of what your tax season will look like. 

As you prepare for tax season, it’s important to understand a little bit about what it will look like for your organization. 

Nonprofit organizations file different types of Form 990s depending on certain criteria of the financial standing of the fiscal year. These include the 990-N, 990EZ, standard Form 990, and the 990-T.

How do you know which one to file? Here are the criteria:

  • 990-N – The 990-N (or electronic postcard) is filed by nonprofits (but not private foundations) with gross receipts of less than $50,000. It is an eight-question, online form that can be completed and submitted from your nonprofit’s computer.
  • 990EZ – The 990EZ is filed by nonprofits with gross receipts greater than $50,000 but less than $200,000 or less than $500,000 in total assets. 
  • Standard 990 – If your organization has at least $200,000 in gross receipts or greater than $500,000 in total assets, you’ll need to file the standard Form 990.
  • 990-T – The 990-T must be filed by organizations that earn $1,000 or more in gross income from an unrelated business.  

The 990-N and EZ forms are both shorter versions of the standard 990 while the 990-T is a slightly varied version. Therefore, when most people think of the form, they picture the standard Form 990, which looks like this:

This sample Form 990 shows the type of information a nonprofit will have to compile for their annual tax forms.

Knowing which form your nonprofit needs to file is the first step. Remember, these apply to all tax-exempt organizations with some exceptions. Or, if your organization is a private foundation, you’ll need a specialized form called the 990-PF.

As you file any of these types of forms, be sure to remember not to include personal information on the document. Because all Form 990s are made public, including personal information could create a security risk for individuals at your organization. One study showed that between 2001 and 2006, 18% of nonprofits included at least one social security number on their Form 990. While we hope that number has decreased over the years, any inclusion of personal information creates a major risk for individuals at nonprofits. 

According to this article, one of the key steps to take to promote safety and security at your organization is educating your staff. Be sure that anyone who works with public documents like your Form 990 has undergone thorough training explaining what information should be included or left off of the document. 

2. Keep all of your financial data organized. 

When you file your annual Form 990, you’ll need to report functional expense information. Ensure your financial data is already organized in such a way that you can easily pull a report from the year and simply fill in the blanks. Generally, this information will be pulled from your Statement of Functional Expenses. 

This report organizes all of your expenses into three specific categories of operational expenses: program expenses, administrative expenses, and expenses related to fundraising activities. This information is laid out in the same way on the Form 990, making it easy to transfer information from one report to the other. 

Your statement of functional expenses will look something like this:

This example of a Statement of Functional Expense shows the breakdown of different nonprofit expenses.

Before you dive into tax season, you should make sure your nonprofit accounting software solution is set up to pull this specific report (along with other key statements) so that you’ll have all of the financial information you’ll need to report back to the IRS. 

One of the great benefits of working with a dedicated nonprofit accountant is that they can help you decipher these documents and identify the information you need quickly and efficiently. These individuals frequently review financial reports and documentation and can not only help you file your tax forms, but also help you understand how to read, analyze, and interpret next steps from key financial reports.

3. Check your double-entry financial system. 

According to Jitasa’s article on nonprofit bookkeepers and accountants, a nonprofit accountant is usually the one to balance both sides of transactions. 

This double-entry accounting is incredibly important when it comes to tax season because you’ll need to list your assets and liabilities both on your 990. When you have an accurate system of accounting that ensures effective recording of both debits and credits, you can be sure this section of your 990 is also correct. 

Make sure you double-check your double-entry financial system before tax season starts. This means: 

  • Ensuring all past entries are correct
  • Checking internal controls for recorded data
  • Checking recorded debits and credits against bank account data

Having this information on-hand, correct, and ready to go will help you fly through tax season. If you don’t have a certified nonprofit accountant on staff, consider outsourcing the service through a specific nonprofit accounting firm. They can help you make sure all information is correct and complete any necessary forms during tax season. 

4. Research the rules and adhere to tax season. 

As explained in the overview section, different nonprofits file different versions of Form 990s depending on their annual gross revenue or net assets. In addition to understanding which form your nonprofit needs to file, you should keep in mind the rules and regulations that are imposed for your tax season. 

Be sure to look up the specific rules for the type of organization you work with. For instance, you may find slight variations in tax form requirements for political organizations, associations, religious organizations, and charities. 

You should also be aware of the rules concerning deadlines and extensions for tax forms. In general, these rules around deadlines include: 

  • Nonprofits must submit their Form 990 by the 15th day of the fifth month after the conclusion of their fiscal year. For organizations using the calendar fiscal year, this means the deadline is May 15th. 
  • If you think your organization is in danger of missing the deadline, you can file the Form 8868 by the deadline when your 990 Form would have been due. If approved, this will extend your 990 submission deadline by 6 months. File 990’s guide to extensions explains more about the process of filing a Form 8868. 

Be aware that the extension form does not apply for the 990-N. However, it can be used for these other tax forms: Form 990, Form 990-BL, Form 990-EZ, Form 990-PF, Form 990-T, Form 1041-A, Form 4720, Form 5227, Form 6069, and Form 8870. While most nonprofits only worry about their specific 990, you should talk to an accountant to see if you’ll need to file any of these other forms.

If your organization is late filing your tax forms and doesn’t request a Form 8868, you’ll endure some penalties from the IRS. These penalties consist of: 

  • If your gross revenue is less than $1 million per tax year, you’ll have a $20 fee per each day the Form 990 is late, up to $10,000 or 5% of your gross receipts (whichever is less). 
  • If your gross revenue is greater than $1 million per tax year, you’ll have a fine of $100 per each day your Form 990 is late. 
  • If your nonprofit doesn’t file for 3 consecutive years, you’ll lose your tax-exempt status. 

The best way to avoid these penalties is to file correctly and on time each and every year. Set a reminder somewhere where you know you’ll see it to make sure this happens. Or, hire an accountant who can help make sure your forms are filed correctly and on time each year. 

5. Remember the benefits of filing your 990. 

Don’t get too hung up on the penalties and negative aspects of your tax forms. There are positives to filing your 990!

First, simply filing a 990 is a blessing! It means you don’t need to pay taxes. Make sure to keep this in mind and remember that your nonprofit should be thankful for the opportunity to file this form rather than pay the IRS annual taxes and fees.

Also, filing your Form 900 is a system of accountability. It acts as an internal control and provides an excuse to double-check your financial systems at least once right after your year-end fundraising wraps up. 

Finally, your nonprofit’s Form 990 helps increase financial transparency with donors. Because the form is public record, any interested donor or dues-paying member can check the nonprofit’s financial data. You can show them that you’re responsibly handling their money, improving trust with contributors.

In the long run, your Form 990, along with some other key tools, will help your organization grow.

One of the other important aspects about tax season is simply understanding how it works. By reading this article, you’re off to a great start! It’s a good idea to keep researching, though. Read more articles specifically regarding filing Form 990s, nonprofit accounting, and funding information for your nonprofit. Then, bring your questions to a dedicated accountant so that you’re sure you have a thorough understanding before tax season begins this year! 

This article was contributed by Jon Osterburg from Jitasa.

Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa, an accounting firm that offers bookkeeping and accounting services to not for profit organizations.

Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa, an accounting firm that offers bookkeeping and accounting services to not for profit organizations.

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Flickr: Two Ladies & Two Cats The hands-down, most hated and most frequently-avoided marketing task is budgeting. I hear that from you and your peers time and time again.

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