An Overview of Compliance Requirements for 501(c)(3) Organizations

501(c)(3) organizations play a vital role in supporting community needs and advancing various causes. These public charities enjoy tax-exempt status, which comes with specific compliance requirements to ensure transparency and accountability. Understanding these rules helps maintain good standing with federal and state authorities and builds trust with donors and the public.

Federal Compliance Requirements

The cornerstone of federal compliance for 501(c)(3) organizations is the annual filing of Form 990 with the Internal Revenue Service (IRS). This form serves several key purposes:

• Financial reporting: Provides an overview of the organization’s financial activities
• Governance disclosure: Details organizational policies and board composition
• Program reporting: Outlines the organization’s mission and significant activities
• Compensation disclosure: Reports compensation for key employees and highest-paid contractors

The specific version of Form 990 required depends on the organization’s gross receipts and total assets. Smaller entities may be eligible to file the simpler Form 990-EZ or the postcard-sized Form 990-N (e-Postcard). Some organizations may also be required to file Form 990-T if they generate revenue that is not related to their exempt purpose.

Timely and accurate filing is essential. Late submissions can result in penalties, while failure to file for three consecutive years leads to automatic revocation of tax-exempt status. For larger entities, the Form 990 filing is a much more significant undertaking.

It’s important to note that Form 990 is a public document accessible to donors, charity watchdogs and the general public. It’s far more than just a tax filing; it’s an opportunity to drive the narrative around your organization and the work it performs.

Employment-Related Filings

Much like any other organization, nonprofits must also comply with employment-related filings such as W-2s for employees and 1099s for contractors.

The IRS Form 990 specifically inquires about these filings to verify compliance with employment tax obligations. This includes confirming the number of W-2s and 1099s filed, ensuring organizations maintain proper employment records and fulfill their tax responsibilities.

State Compliance Requirements

State-level compliance adds complexity for 501(c)(3) organizations. Requirements vary by state but often include annual financial reports, charitable solicitation registrations, corporate filings, and maintenance of state tax exemptions. Some states may also require independent audits for nonprofits above certain revenue thresholds.

Organizations operating or soliciting in multiple states face the challenge of navigating various, sometimes conflicting, state requirements. Staying informed about specific regulations in each state of operation is essential for maintaining compliance.

Governance and Best Practices

While not legally mandated, the IRS strongly encourages 501(c)(3) organizations to adopt governance practices that demonstrate a commitment to transparency and accountability. These practices can enhance public trust and donor confidence and are considered best practices in nonprofit management.

Key governance practices include:

• Implementing internal controls to safeguard assets and ensure accurate financial reporting
• Maintaining thorough documentation of board meetings and decisions
• Adopting conflict of interest policies to manage potential conflicts among board members and staff
• Establishing document retention and destruction policies

Organizations should also consider implementing whistleblower policies, executive compensation guidelines and gift acceptance procedures. For those with significant assets, developing an investment policy helps outline objectives and risk tolerance.

The IRS Form 990 includes questions about these practices, reflecting their importance in nonprofit management. Having these policies in place can provide assurance to donors and the public that the organization is managed well and accountable.

Donor-Related Compliance

Proper handling of donations is vital for maintaining public trust and IRS compliance.

Organizations must provide written acknowledgments for single contributions of $250 or more, detailing any goods or services received in return. More specific rules apply to non-cash donations and any funds raised from special events or gaming activities.

Non-Cash Donations

Special rules apply to non-cash donations, especially high-value items:

• Donations over $5,000 (excluding publicly traded securities) require a qualified appraisal
• Form 8283 is typically filed for non-cash donations over $500
• Special rules apply for donations of vehicles, boats and airplanes, which require the use of Form 1098-C. Organizations must file specific forms and provide detailed information about the vehicle’s condition and ultimate use or sale.

Other frequently donated non-cash contributions include assets such as publicly traded securities and cryptocurrencies. It’s important that organizations have policies that specify how these non-cash donations should be managed.

While it can prove challenging, organizations must be diligent in tracking and valuing non-cash donations. Failure to properly account for these donations can affect filing thresholds and overall financial reporting.

Special Events and Gaming

Organizations engaging in gaming activities — one common example being 50/50 raffles — face additional compliance requirements outlined in IRS Publication 3079. Raffles, bingo nights and similar activities are considered gaming and may be subject to specific state laws.

These regulations can vary significantly from state to state, potentially including licensing requirements, reporting obligations and restrictions on the types of games allowed. Understanding and complying with these state-specific regulations is crucial before organizing such events to avoid potential legal issues. Penalties for non-compliance here can be significant, so be sure to discuss any fundraising activities that may be considered gaming activities with your CPA or legal advisor ahead of time.

Organizations that host special events may also be subject to additional reporting requirements. For instance:

• Donated non-cash goods for auctions must be tracked for non cash revenue/expense.
• The purchase of auction goods should be divided between contribution and event revenue (as outlined in IRS Publications 526 and 1771).
• Ticket sales should be tracked separately from donations.

Common 501(c)(3) Compliance Pitfalls

Even well-intentioned organizations can stumble in their compliance efforts. Some common mistakes include:

• Overlooking non-cash donations in revenue calculations, which can affect filing thresholds and overall financial reporting.
• Incorrect bookkeeping practices, especially for smaller organizations. This includes failing to properly record investment income such as interest, dividends and realized gains.
• Mishandling related entity transactions, particularly when reimbursing a related entity for shared expenses or staff costs.
• Incomplete board member reporting, including failing to report all individuals who served on the board during the year (along with their start and end dates).
• Misclassifying workers as independent contractors instead of employees, which can lead to significant tax and legal issues.

These pitfalls can have serious consequences for 501(c)(3) organizations, potentially affecting their tax-exempt status or leading to penalties.

For example, overlooking non-cash donations might cause an organization to understate gross receipts. The understatement of gross receipts may cause the organization to file the incorrect version of Form 990 (N, EZ, or Full) since the type of return they are required to file is determined by gross receipts.

Organizations should be aware of these common mistakes and take proactive steps to avoid them, such as implementing robust tracking systems for non-cash donations and maintaining detailed records of board membership throughout the year.

Special Considerations for Higher Education Institutions

Higher education institutions and their affiliated foundations face unique compliance challenges due to their complex structures and diverse funding sources.

These organizations often need to navigate:

• Managing large endowments that require sophisticated investment management and compliance with donor restrictions
• Complying with unrelated business income tax (UBIT) regulations for activities like facility rentals or bookstore operations
• Adhering to financial aid reporting requirements, particularly for institutions participating in federal student aid programs
• Meeting NCAA (National Collegiate Athletic Association) compliance standards and EADA (Equity in Athletics Disclosure Act) reporting requirements for institutions with athletic programs

These organizations often require specialized expertise to navigate their complex regulatory environment. Given the intricacies of compliance for higher education institutions, consulting with experienced advisors can help ensure comprehensive compliance support and allow these organizations to focus on their educational mission.

Keep Your Nonprofit Organization Compliant with James Moore

Navigating the compliance landscape is essential for 501(c)(3) organizations to maintain their tax-exempt status and uphold public trust. Organizations benefit from being proactive in their compliance efforts, addressing questions and concerns throughout the year rather than waiting until tax preparation time. Early identification of compliance issues allows for timely corrections and can prevent more serious problems emerging down the line.

For tailored guidance on compliance matters, reach out to a nonprofit accountant at James Moore. We provide comprehensive solutions tailored to your organization’s unique needs and circumstances, helping you stay ahead of compliance issues and focus on fulfilling your charitable mission.

Contact us today to learn more about our accounting, tax and advisory services for nonprofit organizations.

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