5 Keys for Maintaining Your Nonprofit Status

For many nonprofits, gaining tax-exempt status is a major milestone, allowing organizations to receive tax-deductible donations, exempt from federal income taxes, and access certain state and local tax benefits. However, obtaining tax-exempt status is just the beginning. Ongoing compliance is essential to keep these benefits. Below are some key steps every nonprofit should take to stay in good standing with both the IRS and their selective state laws.

1. File an Annual Federal Form 990

The IRS requires tax-exempt organizations to submit a Form 990 annually, with options based on your organization’s size and income level. For instance:

• Form 990-N for organizations with gross receipts under $50,000.

• Form 990-EZ for those with receipts under $200,000 and assets under $500,000.

• Form 990 for larger organizations.

Nonprofits should prioritize this filing, as failure to submit a Form 990 for three consecutive years can result in automatic revocation of tax-exempt status. Filing accurate and timely information is essential, as Form 990 provides transparency to donors, regulators, and the public about your nonprofit's operations and finances.

2. Apply for State Sales and Franchise Tax Exemptions

In some states, nonprofits don’t automatically receive state sales or franchise tax exemptions by virtue of their federal tax-exempt status. They must apply separately with the State Comptroller’s Office by submitting the their state’s Application for Exemption – Federal and All Others.

Upon approval, your organization can make qualifying purchases tax-free and will be exempt from the state’s franchise tax. However, note that it may be required to renew the exemption periodically, so be sure to keep track of your renewal dates to avoid unexpected tax liabilities.

3. Maintain Proper Corporate Records

Nonprofits are typically required to keep accurate and comprehensive records, including:

- Meeting minutes for board and committee meetings.

- Records of major decisions, policies, and financial transactions.

- Lists of donors and memberships, if applicable.

Good record keeping practices protect your organization in the event of an audit and ensure it operates transparently and in alignment with both state and federal law. Some nonprofits are also required to file a Public Information Report with the state to maintain updated records on the organization’s officers, directors, and registered agent.

4. Follow Restrictions on Political Activity and Lobbying

The IRS imposes limits on the political activities of tax-exempt organizations. Nonprofits that are 501(c)(3) organizations cannot support or oppose political candidates, and any lobbying activities must remain “insubstantial” relative to their overall operations.

In some states, certain lobbying activities can trigger registration and reporting requirements under the certain Ethics Commission. For nonprofits involved in advocacy, understanding these limitations is key to avoiding penalties and maintaining good standing.

5. Educate and Train Your Board on Compliance

Board members play an integral role in nonprofit governance and are often tasked with ensuring compliance with legal and ethical standards. Investing in training on board responsibilities, tax-exempt status requirements, and fiduciary duties can help protect the organization from potential compliance issues. Many nonprofits also consider drafting and adopting internal policies, such as conflict of interest, whistleblower, and document retention policies, to further safeguard compliance.

Final Thoughts

While maintaining tax-exempt status requires careful attention to regulatory requirements, staying informed and proactive can make a significant difference. Compliance is not only a legal responsibility; it’s a way to demonstrate credibility, transparency, and accountability to donors, beneficiaries, and the community. By prioritizing these steps, your nonprofit can stay on track to fulfill its mission and continue making a positive impact.

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Need Help in Navigating Compliance?

If you’re looking for guidance on any aspect of nonprofit compliance, our team at Prosperity Practiced is here to support you. Reach out today for a free consultation and learn how we can help you maintain tax-exempt status while empowering your organization to grow with confidence.