Nonprofit Organizations: Annual Compliance Obligations
Charitable organizations must make several annual filings in order to maintain tax exempt status and lawfully solicit contributions. This blog outlines the major compliance obligations applicable to organizations exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code.
Federal – IRS Compliance
To maintain the exemption from income tax, charitable organizations (as well as certain charitable trusts and 527 political organizations) must file an information return every year. The type of return depends on whether an organization is classified as a “private foundation” or a “public charity”. Private foundations are required to file a Form 990-PF.
A public charity is required to file one of several variations of a Form 990, depending on its gross receipts (that is, revenue before deducting expenses).
As of March 2020, if an entity typically has less than $50,000 in gross receipts, then it needs to file a very simple “e-postcard”, called a 990-N, on the IRS website. As of publication of this blog, the link for information on how to do so can be found here: https://www.irs.gov/charities-non-profits/annual-electronic-filing-requirement-for-small-exempt-organizations-form-990-n-e-postcard.
If the organization’s gross receipts normally exceed $50,000 but are less than $200,000 and the charity does not have $500,000 or more in assets, then it can file a short form information return (a 990-EZ). If the organization exceeds $200,000 in gross receipts or has $500,000 or more in assets, then it must file a Form 990. Both of these forms are available at the IRS website. These forms outline the work that the charity has performed in the prior year, in addition to reporting raw numbers. They must be included in the organization’s public file, and the narrative portion is important in showing donors and potential donors the achievements the organization has made.
If a charitable organization generates income from activity unrelated to its charitable purpose, the income associated with that unrelated business is taxable and the organization will also need to file a 990-T reporting the amount of income on which it is subject to taxation.
Annual information returns are due the 15th day of the 5th month after the end of an entity’s fiscal year. So, if the organization is on a calendar year, the information return is due by May 15 of each year. Failure to file by the due date will result in a penalty of $20 per day for each day the return is late unless the charity can show reasonable cause for the delay, and failure to file for three consecutive years will result in the automatic revocation of the organization’s tax-exempt status. If this occurs, the organization will need to re-apply for a determination that it qualifies as tax exempt.
State Compliance – Corporate Annual Report
Assuming the entity is organized as a nonprofit corporation, there is typically a state corporate return due annually. In Michigan, the annual return is due for nonprofit corporations by October 1 of each year, and failure to file for two consecutive years will result in an automatic dissolution of the nonprofit corporation. To renew the corporation's existence, it must complete and submit the reports for the years in which reports were not filed, pay the annual fee for all years for which they were unpaid, and pay a penalty (currently $5.00) for each delinquent report.
State Compliance – Attorney General
Separate from filing with the state corporation’s division, the organization needs to ensure compliance with the Attorney General’s office in each state in which it carries on activity. In Michigan, a nonprofit corporation files a combined Initial Charitable Trust Registration if it holds any assets in the State. Once registered as a Charitable Trust, there is nothing additional to be done while the entity is operating in the ordinary course (if it dissolves, mergers, or sells substantial assets, it may need to seek Attorney General approval).
However, if an organization solicits or receives donations in the state of Michigan, an organization must also submit a Charitable Solicitation Application. The license to solicit donations is a one-year license that requires annual renewal. Failure to do so could result in fines or other action by the state Attorney General.
If you have questions about whether your charitable organization is in compliance with applicable federal or Michigan law, please contact us.
Photo: Lisa B’s niece Kendall Berden’s dog Jax is a five month old Staffie/American Bulldog who is very good at compliance.
