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Filing taxes can be stressful — especially if you’re a new nonprofit. But the process can become pretty simple and standard over time with the right tips and tricks.
In this blog, we’ll cover everything there is to know about nonprofit taxes, including how and when to file them, and what happens if you don’t.
Do nonprofit organizations file tax returns?
Before we jump into more of the granular details, let’s cover the basics.
Just like for-profit businesses, nonprofits are required to file tax returns. However, the type of tax return nonprofits are required to file differs.
Nonprofits with tax-exempt status from the IRS, like 501(c)(3) organizations, must file a specific 990 form. These forms typically ask for information about the organization’s financial activities and governance.
Most nonprofit organizations have to file one of the following, depending on their structure and income:
Form 990: This is the primary form used by tax-exempt organizations. It comes in several versions, depending on the size and financial activities of the nonprofit. It includes information on the organization's finances, activities, governance, and compliance with tax laws.
Form 990-EZ: This form is For nonprofits with gross receipts less than $200,000 and total assets less than $500,000.
Form 990 (Long Form): For nonprofits with gross receipts of $200,000 or more or total assets of $500,000 or more.
Form 990-N (e-Postcard): This form is for nonprofits with gross receipts of $50,000 or less. It's a simple, electronic form that requires basic information about the organization.
How to prepare a nonprofit tax return
How do I file a nonprofit tax return?
While every form is a bit different, completing each one usually involves the same process:
1- Determine the correct form: Identify which version of Form 990 your nonprofit must file based on its size and activities.
2- Gather information: Collect all necessary financial and operational data, including revenue, expenses, assets, liabilities, program details, governance structure, and compensation information.
3- Complete the form: Fill out the appropriate Form 990 with all of the required information.
4- Review and sign: Review the completed form for errors or omissions. Ensure it's signed by an authorized individual, typically an officer or director.
5- Submit to the IRS: Depending on the form type and IRS requirements, you can file the form electronically or by mail. Electronic filing is required for some forms.
6- Keep records: Retain a copy of the filed form and all supporting documents for your nonprofit's records.
What kind of tax return does a nonprofit file?
Nonprofit organizations use different versions of Form 990 to file their annual returns with the IRS. To determine which form your nonprofit should file, visit the IRS website for more information.
In general, though, there are a few common types of tax returns for nonprofit organizations:
Form 990-N (e-Postcard): This form is for nonprofits with gross receipts of $50,000 or less. It's a simple, electronic form that requires basic information about the organization.
Form 990-EZ: For nonprofits with gross receipts under $200,000 and total assets less than $500,000. This form requires more detailed information than the 990-N, including revenue, expenses, and governance details.
Form 990 (Long Form): For nonprofits with gross receipts over $200,000 or total assets over $500,000. This is the most detailed form, requiring comprehensive information about financial activities, governance, compensation, and programs.
Form 990-PF: This form is for private foundations, regardless of their size, and contains additional information related to grants, contributions, and other activities.
Form 990-T: If a nonprofit earns income from unrelated business activities (activities not related to its exempt purpose), it must file Form 990-T to report and pay taxes on this income.
Form 990-BL, Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Certain Related Persons A black lung trust (described in Section 501(c)(21)) must file Form 990-BL if its gross receipts are normally more than $50,000.
Form 1065, U.S. Return of Partnership Income A Section 501(d) religious and apostolic organization files Form 1065
Form 990
What is the IRS Form 990?
The IRS Form 990 is the most common kind of nonprofit tax return. Filed annually, Form 990 provides a comprehensive overview of an organization's financial status, operations, governance structure, and compliance with tax laws. It’s important to note that the information in Form 990 is also public information — once it’s filed, anyone in the public can view it online.
Sometimes, nonprofits use their tax filing as an opportunity for donor stewardship and marketing. Many organizations take the findings of their Form 990 and generate their own annual report for the public.
Why is filing Form 990 important?
Aside from maintaining tax-exempt status, filing a Form 990 is crucial for maintaining your organization’s reputation. Filing shows donors and your community your dedication to transparency.
How to file your nonprofit’s Form 990
Filing your nonprofit's Form 990 with the IRS requires a few key steps:
1- Determine the correct Form 990: There are several versions of Form 990, depending on your nonprofit's size and activities. These include:
Form 990-N (e-Postcard) for gross receipts of $50,000 or less.
Form 990-EZ for gross receipts less than $200,000 and total assets less than $500,000.
Form 990 for larger nonprofits with gross receipts of $200,000 or more or total assets of $500,000 or more.
Form 990-PF for private foundations.
Form 990-T if your nonprofit has unrelated business income.
2- Collect necessary information: Gather financial statements, records of revenue and expenses, governance details, program information, and any other relevant data.
3- Fill out the form: Complete the appropriate Form 990, and make sure all sections are filled out accurately.
4- Review and approve: Have your board or an authorized officer review the form to ensure it's correct and complete.
5- File the form: Depending on your form and size, you may need to file electronically or by mail. Follow the IRS instructions for your specific form.
6- Keep records: Retain a copy of the filed form and supporting documents for your records.
Standard due date: Form 990 is due on the 15th day of the 5th month after the end of your nonprofit's fiscal year. For example, if your fiscal year ends on December 31, your due date is May 15 of the following year.
Extensions: If you need more time to file, you can request an extension. Form 8868 allows nonprofits to apply for an automatic six-month extension.
Best practices for filing your nonprofit taxes
Filing your nonprofit taxes can feel intimidating, but with the right tips and tricks, it can become a simple and routine part of your business operations. For the most seamless experience possible, consider:
Consulting with a tax professional: If you're unsure about your nonprofit taxes, talk to a tax professional or accountant who specializes in nonprofit taxation. They can help ensure accuracy and compliance.
Keeping accurate financial records: Accurate financial record-keeping throughout the year will simplify tax filing. Be sure to keep records of income, expenses, assets, liabilities, and other relevant financial data.
Using accounting software: Accounting software can help streamline record keeping. Tools like QuickBooks, Sage Intacct, or Zoho Books can help you avoid errors and be prepared when it’s time to file taxes.
Completing your taxes long before the due date: Nonprofits are busy and tax season can approach quickly. Take some of the stress out of filing by completing them a few months in advance. That way, you have some time to carefully and thoughtfully complete them.
Both global and grassroots nonprofits are busy — keeping track of contributions and fundraising activities throughout the year can become burdensome quickly. By pairing accounting software with Zeffy, a completely free fundraising platform, nonprofits can send automated tax receipts of donors, keep track of contributions, and so much more.
Not filing your nonprofit taxes can lead to a few consequences:
Poor donor relationships and grant opportunities: Not filing your nonprofit taxes can lead to some pretty severe reputational damage. Donors, grant-making organizations, and other stakeholders often use Form 990 to assess a nonprofit's accountability and transparency. Without that, funders might not trust your organization, making it harder to secure donations and grants.
Penalties: Nonprofits that miss the filing deadline for Form 990, 990-EZ, or 990-PF face financial penalties, too. According to the IRS, If an organization fails to file a required return by the due date (including any extensions of time), it must pay a penalty of $20 a day for each day the return is late. The same penalty applies if the organization does not give all the information required on the return or does not give the correct information.
Loss of status: The most severe consequence of failing to file is losing tax-exempt status. If a nonprofit fails to file the required Form 990, 990-EZ, or 990-N for three consecutive years, the IRS automatically revokes its tax-exempt status.
If an organization’s return is incomplete or the wrong return for the organization, the IRS will send it back with one of the following letters:
Letter 2694C Returning Form 990 due to Missing Information
Letter 2695C Returning Form 990-EZ due to Missing Information
Letter 2696C Missing Information Request to Process EO Return
In response, your nonprofit organization will need to follow the instructions noted, and Include a reasonable cause explanation of why you didn't initially submit all the required information with your return.
To avoid further penalties, send the corrected return and your reasonable cause statement within 10 days of the date of the letter.
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