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3 Tax Reporting Requirements a Nonprofit Must Remember

nonprofit tax Aug 30, 2021
Accounting Tips for Nonprofits Tax Requirements

Most nonprofit organizations are classified as exempt from tax. However, this doesn’t mean an organization doesn’t have any tax reporting responsibilities. Nonprofit organizations need to be aware of three tax reporting requirements that may apply to them. 

Here are three tax-related requirements that, if forgotten, can create major headaches for your organization.

Responsibility #1: Sales Tax

It isn’t uncommon for a nonprofit to sell goods, everything from t-shirts to branded goods. This is a great fundraising strategy while also helping market a nonprofit’s mission. However, it is important to remember that sales of this type can be subject to sales tax and the appropriate steps be taken to ensure the organization is prepared to collect, report and remit sales tax to the state.

In most states, a sales tax is imposed on the sale of tangible property and some services. If a state doesn’t specifically exclude nonprofit organizations from collecting sales tax, an organization is required to register with the state, collect sales tax on goods and some services and remit that tax to the state taxing authority.

Sales tax can be very complex. Each state establishes its own sales tax regulations and if an organization has sales to taxpayers in other states the requirements can change significantly.

It’s important to have a knowledgeable resource to ensure your organization is compliant with sales tax laws to avoid significant penalties and interest.

Responsibility #2: 1099 Reporting

It is common for an organization to utilize independent contractors to assist in fulfilling its mission. This can include payments made to attorneys, accountants, marketing professionals, grant writers and other various types of freelancers. When contractors are utilized, an organization may be required to report payments made on 1099’s at the end of each year.

1099 reporting is required if payments totaling $600 or more is paid to an unincorporated contractor during the year via cash, check or ACH transfer. 1099 forms are issued to the contractor(s) paid as well as the Internal Revenue Service by the end of January of each year.

It is important to have a solid bookkeeping process in place to ensure amounts paid to each contractor are properly tracked. Having the information when it comes time to prepare the forms will make this annual process much easier.

Responsibility #3: Filing Tax Returns

Just because most nonprofits are classified as exempt from income tax doesn’t mean they aren’t required to report to the Internal Revenue Service each year. This is important because a nonprofit’s exempt status will be revoked if returns aren’t filed.

Nonprofit tax returns look much different than a typical corporate tax return and they can be much more complicated. Nonprofit returns focus on reporting program accomplishments, revenues, expenses and disclosing specific information. The nature and complexity of these returns requires experience and knowledge to ensure they are completed correctly.

Inaccurate and/or untimely returns can be detrimental to a nonprofit organization. If an organization fails to file for three consecutive years, an organization’s exempt status will be automatically revoked, and all activities will be considered taxable. Any donations made to the organization will no longer be considered tax deductible donations to the donor. 

Stay on top of filing deadlines and avoid rejected returns due to inaccurate information by using a professional tax preparer familiar with the intricacies with nonprofit reporting.

Failing to stay on top of these tax reporting requirements can be detrimental to an organization. Penalties, interest and/or loss of nonprofit status can all have a significant affect on cash flow and overall operations, resulting in reducing the impact of fulfilling your mission.

The best way to ensure all these complex issues are handled appropriately is to work with a nonprofit tax professional. If you need assistance in one or more of these areas, schedule a call. Get the support you need to be confident your organization is compliant with all tax reporting obligations.

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