While tax-exempt organizations are generally exempt from paying federal income tax, that does not mean they are exempt from filing taxes altogether. In fact, most nonprofit and charitable organizations must file an annual information return—commonly known as Form 990—with the Internal Revenue Service (IRS). This filing helps the IRS and the public monitor how the organization operates, ensuring it continues to qualify for tax-exempt status.
What It Means to Be Tax-Exempt
A tax-exempt organization, typically recognized under Section 501(c) of the Internal Revenue Code, is not required to pay federal income tax on funds related to its exempt purpose. Examples include charitable, religious, educational, and scientific organizations. However, the IRS still requires these entities to disclose their financial activities annually. The exemption only applies to income generated from charitable or mission-based activities—not all income.
Filing Requirements for Tax-Exempt Organizations
Even though tax-exempt organizations do not pay federal income tax, they must file an annual return to report their operations and maintain transparency. The type of return depends on the size of the organization:
- Form 990-N (e-Postcard): For organizations with annual gross receipts of $50,000 or less
- Form 990-EZ: For organizations with gross receipts under $200,000 and total assets under $500,000
- Form 990: For larger organizations exceeding those thresholds
- Form 990-PF: Required for all private foundations, regardless of income
The filing deadline is typically the 15th day of the 5th month after the end of the organization’s fiscal year. For example, nonprofits with a December 31 year-end must file by May 15.
When Tax-Exempt Organizations Must Pay Taxes
Even tax-exempt organizations may owe taxes in certain situations. If a nonprofit earns income from activities unrelated to its exempt purpose, that income is subject to Unrelated Business Income Tax (UBIT) and must be reported using Form 990-T. Examples include running a side business or renting out property not used for charitable purposes.
The Importance of Filing
Failing to file a required return for three consecutive years results in the automatic revocation of tax-exempt status. This means the organization would have to pay income tax and reapply with the IRS to regain its exemption.
In short, while tax-exempt organizations typically don’t pay federal income taxes, they are still responsible for annual filings to prove compliance, maintain transparency, and preserve their exempt status.
If you are not sure about tax obligations of your tax-exempt organization, reach out to Dimov Tax today. Our team presents expert assistance to nonprofits.