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Maintaining Tax Exempt Status

Loss of tax-exemption could have disastrous consequences for a nonprofit organization. Every nonprofit leader, whether board or staff, should be familiar with the annual filing requirements and activities that should be avoided in order to protect and maintain tax-exempt status. We have summarized the “hot button” issues that should be on your radar screen if you are a nonprofit leader, and provided links to useful information on the topic of protecting and maintaining tax-exempt status.

Download a tip sheet on what to do if your organization's tax-exempt status is revoked.

First, be familiar with this list from IRS Publication 1828 of compliance requirements for every public charity (501(c)(3) nonprofit organization): All IRC section 501(c)(3) organizations, including churches and religious organizations, must abide by certain rules:

  • Net earnings may not inure to any private shareholder or individual,
  • Not provide a substantial benefit to private interests,
  • Not devote a substantial part of their activities to attempting to influence legislation,
  • Not participate in, or intervene in, any political campaign on behalf of (or in opposition to) any candidate for public office, and
  • The organization’s purposes and activities may not be illegal or violate fundamental public policy.

Charitable nonprofits can lose their tax-exemption or face stiff penalties, called “intermediate sanctions” for engaging in the activities listed above.

Additionally, all nonprofits that are recognized as tax-exempt (with some exceptions) have an obligation to file an annual return with the IRS. Failure to file can result in automatic revocation of tax-exempt status.

What is the significance of losing tax-exemption?

  • It means that your nonprofit is no longer exempt from federal income tax and will have to pay corporate income tax on annual revenue.
  • The organization may also be subject to back taxes and penalties for failure to pay corporate income taxes as of the effective date of revocation.
  • It may also mean that any state tax exemptions that your nonprofit received – such as exemptions for income tax, property tax, and sales/use tax -- that are dependent on federal tax-exempt status, may also be revoked.
  • And it means that your organization will not be listed in IRS Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986, which is the official list of organizations eligible to receive tax-deductible charitable contributions.
  • Additionally, this means that donors will not be able to receive a tax deduction for their gifts to the organization after the revocation date.
  • Finally, most private foundations are unlikely to give a grant directly to nonprofits that are not tax-exempt because their guidelines normally require grantees to be recognized as tax-exempt public charities, since federal tax law imposes an excise tax on the foundation for grants made to organizations that are not tax-exempt.

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