Filing taxes as an individual can be an overwhelming task, and even more so as a nonprofit organization. Mathew Tooker from File990 offers the following five important tax tips for organizations.
Few people get into the nonprofit sector because they’re super excited about filing nonprofit tax forms. However mundane, it’s a critical component of running a functional organization and making a difference in your community.
That said, completing a nonprofit tax return can be quite an overwhelming process if you’ve never done it before—and you likely have a lot of questions about how to get started.
At File 990, we work with small and mid-sized organizations to simplify the nonprofit tax process and provide an easy way to file online each year. We also know that strategic online fundraising practices can play a huge role in your accounting and finances, so it’s essential to look at the connection between the two.
In this guide, we’ll cover five critical things to know about online donations, nonprofit taxes, and the relationship between them:
- Online donations to 501(c)(3) organizations can be tax-deductible.
- It’s crucial to provide supporters with donation receipts.
- Nonprofits are required to file IRS Form 990 each year.
- There are multiple versions of Form 990 to choose from.
- Your nonprofit tax forms can function as a marketing tool.
As online giving continues to grow in popularity—by 12.1% in the last year, according to fundraising statistics from Double the Donation—its impact on nonprofit taxes continues to grow. Let’s jump in!
1. Online donations to 501(c)(3) organizations can be tax-deductible.
The first thing you need to know when it comes to online donations and nonprofit taxes is that because your nonprofit, as a registered 501(c)(3), is eligible for tax-exempt status from the IRS, your supporters’ contributions to your organization are tax-deductible as well.
Although tax breaks are likely not at the forefront of your donors’ motivations for giving, it certainly is a bonus that can encourage more significant gifts and improve your fundraising campaigns when leveraged effectively. Therefore, be sure to communicate your tax-exempt status with donors and prospects. You can do this by including a note on your online donation page.
2. It’s crucial to provide supporters with donation receipts.
For supporters to receive the tax benefits outlined above, you must provide them with written confirmation of their gift in the form of a tax or donation receipt, regardless of the size or type.
While the IRS does not require tax receipts to be distributed for gifts smaller than $250, it’s generally a good practice to provide them to any and everyone who gives—from your small and mid-level donors to your corporate fundraising partners.
To ensure your receipt follows IRS guidelines and that donors can receive their tax benefits, include the following pieces of information in every receipt:
- The name of your organization;
- The amount of a cash contribution;
- A description (but not the value) of a non-cash contribution;
- A statement that the organization provided no goods or services in return for the contribution.
Luckily, online donations can significantly simplify this process for organizations so that they don’t have to manually draft tax receipts with every gift they collect. For example, donors who make Facebook donations automatically receive a tax receipt for their gift, as do those on many other online giving platforms.
3. Nonprofits are required to file IRS Form 990 each year.
It would certainly be convenient if your nonprofit was only required to file for tax exemption a single year and could forgo tax forms from then on, but unfortunately, that’s not how it goes.
To receive tax-exempt status in the first place, your organization must file Form 1023. Then, you’ll need to renew your exemption by completing Form 990 every year.
If you don’t file your 990 by the specified deadline (the 15th day of the 5th month following the end of the organization’s taxable year), your organization can face severe penalties. These include steep monetary fines and eventually, a loss of tax exempt status.
For organizations following the calendar year, this date falls on May 15th each year. If you find yourself approaching this deadline and don’t expect your time to submit your return in time, you can always file Form 8868 instead for an automatic 6-month extension.
4. There are multiple versions of Form 990 to choose from.
When you’re ready to start filing your nonprofit tax return, you’ll need to determine which form to complete. Small and mid-sized nonprofits are likely eligible for one of two condensed versions of the Form 990—the 990N and 990EZ. However, larger organizations will be required to complete the full return, so make sure you take a look at your annual revenue to determine which category you fall into.
Here are the four most common types of nonprofit tax forms and the differences between them:
- Form 990: Form 990 is the IRS form required for the largest group of tax-exempt organizations with annual gross receipts over $200,000 or total assets over $500,000. This is the full tax return, and the longest process that requires the most detailed information to complete.
- Form 990-EZ: One step down from the full return is Form 990-EZ. If your mid-sized nonprofit has annual gross receipts between $50,000 and $200,000, you might be eligible to complete this abridged version instead.
- Form 990-N: Form 990-N, also known as the e-postcard, is the IRS’s electronic form for tax-exempt organizations with annual gross receipts less than $50,000. The 990-N is only available online, and it’s the shortest, simplest form to complete.
- Form 990-PF: Form 990-PF is completed by all private foundations, regardless of their financial status. This typically includes nonexempt charitable trusts as well as tax-exempt private foundations.
Luckily, online donations (and the software you use to collect them) can help out. For example, you likely have an online database to gather information about your donors, track engagement history, and organize key data points. This can come in handy when determining your organization’s annual revenue and filling out your tax forms.
5. Your nonprofit tax forms can function as a marketing tool.
Did you know that your annual Form 990 (or 990N, or 990EZ) can also serve as a powerful resource for building connections with donors and encouraging continued support? After you submit your return to the IRS, it becomes a matter of public record, meaning donors, prospects, and other stakeholders can get a glimpse of your nonprofit’s finances.
For example, this guide shares that your Form 990 can provide detailed insights into the following elements of your strategy:
- Quality of management
- Tax-exemption status
- Mission and vision
- Major programs funded
Essentially, your 990 provides donors and prospects with a broad overview of your organization and how you allocate your funding. By encouraging transparency and disclosure, nonprofits can earn the trust and confidence of their supporters. When you show off your honorable financial records, you might even encourage some donors to give.
Nonprofit taxes don’t have to be difficult when you have the knowledge and the tools to support your team. By pairing effective accounting practices with successful online fundraising strategies, you’re sure to result in an efficient organization that makes long-lasting change for your mission. Do your research ahead of time, and prepare well. Good luck!