Nonprofit organizations can be inactive for a variety of reasons like transitions in leadership, a lack of funding, or the reorganization of programs. Nonprofit organizations, like 501(c)(3)s, can be inactive, but there can be consequences, such as losing tax-exempt status, for inactivity that lasts too long. Knowing what inactivity means for the IRS will help keep your organization active.
What Does It Mean for a 501(c)(3) to Be Inactive?
A 501(c)(3) is inactive when it legally exists but temporarily stops all operations, such as fundraising, service delivery, or programming. Even if no revenue is earned and no activities occur, the organization is still required to fulfill their compliance and reporting obligations.
Filing Requirements Still Apply
The IRS doesn’t give an official “inactive” status to tax-exempt organizations. Therefore, a nonprofit has to continue to submit its annual returns, Form 990, 990-EZ, or 990-N, even if there is little to no activity. Failing to do so for three years in a row will get you an automatic exemption revocation. After revocation, you will have to apply for exemption all over again and will face possible taxation during the inactive period.
State-Level Requirements
In addition to federal obligations performed, many states also require nonprofits to keep registration active and file annual reports, or renew the reports related to charitable solicitation. If you stop filing these in a nonprofit’s capacity, a state can also dissolve the organization administratively, leaving reinstatement a more complex matter.
How Long Can 501(c)(3) Remain Dormant?
A nonprofit can, in theory, remain inactive permanently, as long as you continue to meet IRS and state filing obligations. Complying without any operational activity will become impractical though over a long period of time. Even in an inactive state, the organization has to keep a board of directors, submit annual paperwork, and, the worst of all, keep precise records.
Options for Nonprofits During Inactivity
If for any reason, your organization must stop operations for a little, make sure to:
- File all reports to ensure exemption status remains active.
- Instead of halting everything, you might decide to reduce some activities like keeping a few small programs operating.
- If an organization anticipates being inactive for an extended period, it might make sense to formally dissolve the organization.
To summarize, a 501(c)(3) nonprofit organization can remain inactive for a period of time as long as it continues to meet the compliance expectations at the federal and state levels. However, prolonged inactivity without the appropriate filings can result in revocation, penalties, and administrative dissolution. Remaining compliant allows your nonprofit to quickly and easily reactivate when the time comes. If you are unsure about your obligations, reach out to Dimov Tax today. Our team stands ready to present expert support.