Ongoing Tax and Governance Compliance for Tax-Exempt Organizations

Ongoing Tax and Governance Compliance for Tax-Exempt Organizations

Existing not-for-profit organizations (“NPO”) must ensure that they annually comply with corporate and tax laws.  The failure to do so may impact the NPO is minor ways or in significant ways.

Tax Compliance

Annual Tax Return Filing (Form 990)

An existing NPO must file a Return of Organization Exempt from Income Tax (Form 990) as soon as it completes its first fiscal year of existence. Occasionally, the NPO may still be awaiting a determination letter from the IRS approving its tax-exempt status.  However, the NPO must file the appropriate Form 990 based on the activities and gross receipts within the first year. 

An amended return can be filed if the IRS determines that the NPO is tax-exempt under a tax section which differs from the application request.  For example, an NPO may apply for exemption as a public charity.  However, the IRS may approve the application as a private foundation.  In such a case, the organization would be able to file an amended Form 990-PF for the year in question.

Following receipt of the determination letter, and assuming the NPO agrees with the IRS’s determination, the NPO must file an annual Form 990.  In some cases, it may be as simple as the online filing of Form 990-N for organizations with gross receipts of less than $50,000 in the taxable year (and less than $250,000 in assets).   An NPO that requires a full Form 990 must ensure that they provide their CPA with annual financials necessary for timely and complete preparation.

Failure to file a Form 990 for three consecutive years automatically revokes the organization’s tax-exempt status.  The process to reinstate tax-exempt status requires the assistance of your attorney and accountant.

Estimated Tax Payments on Unrelated Business Income

If an NPO has unrelated business income in excess of $500 a year, it is required to pay quarterly taxes on Form 990-W.  Unrelated business income is a complex area and beyond the scope of this article, but it is generally an investment by the NPO that is not related to its charitable activities in which it expects to receive an income.  The IRS allows an NPO to receive UBI without losing its tax-exempt status if the UBI is not significant.  The challenge is that there is no formula to determine the amount is not significant. 

Failure to monitor UBI could place the organization in jeopardy of losing its tax-exempt status.

Tax Payments on Net Investment Income for Private Foundations

A private foundation must pay taxes on its annual net investment income.  The payment may be done at the time of filing the tax return (Form 990-PF) or in quarterly estimated payments.    

Governance Compliance

Registration and Filing with the Office of Attorney General

NPOs that fundraise within New York State must register with the Charities Bureau of the New York State Office of Attorney General (“Charities Bureau”).  The initial registration is completed contemporaneously with filing of the Application for Tax-Exempt status or shortly following receipt of the IRS determination letter.

An NPO must file an annual report with the Charities Bureau, along with a copy of their Form 990.  A filing fee may be required as determined by the NPO’s annual gross receipts.  The annual filing, including the Form 990, is publicly available on the Charities Bureau’s website.  Religious organizations are not required to register or to submit an annual filing.

Annual Meetings

New York State requires that an NPO hold a membership meeting at least once each year.  NPC-L 603(b). The membership meeting generally includes voting of directors or officers, discussion of the Board’s annual activities and financial reports, and ratification of certain actions, such as changes in the Bylaws.

Although the NPO does not require an annual meeting of directors, it is likely that the NPO’s Bylaws mandate an annual Board meeting.    Discussions include long-term strategy for the NPO, goals on how to effectuate the NPO’s charitable purposes, financial and tax considerations, and building a team of advisors and support for the Board.

Annual Compliance Makes NPO Management Easier in the Long Run

Taking small steps each year to maintain compliance with the tax and governance laws applicable to your NPO has a big impact for the success of the organization.  Regular communication with your Board, members and advisors ensures that the NPO is proactively managing its activities to avoid potential troubles.

If you have questions about ongoing governance or tax compliance, please contact us to discuss how we can assist your organization.