Form 990 Article Series: 01 Nonprofit Compliance Checklist

This is the first article in a nine-part series on the Form 990.

Despite the crippling effect of the great recession on the nonprofit community, the National Center for Charitable Statistics reported a 12.6% increase of all nonprofit organizations nationally from 2003-2013, and a 31.8% increase in the number of nonprofit organizations in Florida.

While the increasing number of nonprofits will hopefully support the growing needs of the community, these newly formed organizations must understand that healthy nonprofits are not only mission driven but also committed to the business side of the organization, such as maintaining robust revenue streams, making sound investments, closely monitoring tax exempt status and operational controls. In fact, starting a non-profit organization is akin to starting a business, only more challenging as nonprofits must jump through additional hoops to obtain and maintain tax exempt status with the IRS. They must also be cognizant of the importance of properly establishing their organization from the beginning to help obtain and maintain tax exemption status.

Whether you are a well-established nonprofit or if you are considering starting one, it’s imperative that management consider all factors that contribute to the organization’s compliance with federal and state requirements now and throughout the life of the organization. Following are 4 critical components to obtaining and maintaining nonprofit compliance:

1. File for Tax Exemption Status with the IRS.
Most newly formed charitable (501(c)(3)) tax-exempt organizations must file for exemption with the IRS. Form 1023 or Form 1023-EZ* is the application form used by organizations to request tax-exempt status from the IRS. If approval is required, the IRS will issue a determination letter (i.e. exemption letter) providing written assurance about the organization’s tax-exempt status and whether it qualifies to receive tax-deductible charitable contributions.

Nonprofits must draft their articles of incorporation and by-laws with the appropriate wording required by the IRS; failure to do so will result in a rejected application by the IRS. Need help drafting these documents? Speak with a lawyer who is familiar with non-profit organizations.

2. File for Nonprofit Status with your State.
Nonprofit organizations must file with their state to be recognized as a not-for-profit within the state. In accordance with most state statutes, and specifically in the State of Florida, a new organization must file their Articles of Incorporation with the Division of Corporations. Subsequently, all Florida Not-For-Profit Corporations must file an annual report electronically online between January 1st and May 1st to maintain their “active” status. Additional information regarding how to file the annual report is available at www.sunbiz.org.

3. Mandatory IRS Filings to Maintain Nonprofit Status.
Obtaining tax exempt status with the IRS is not a “get it and forget it” designation, it requires organizations to meet annual IRS filing requirements to inform them about their activities and current financial status in order to demonstrate their compliance with federal tax exempt rules.

What form or notice that must be filed annually with the IRS is generally determined by the amount of the organization’s gross receipts or total assets detailed as follows:

• Form 990: Gross receipts greater than $200,000 or total assets greater than $500,000.
• Form 990-EZ: Gross receipts less than $200,000 or total assets less than $500,000.
• Form 990-N e-Postcard: Gross receipts less than $50,000.

An organization that fails to meet their filing requirements for 3 consecutive years will have their tax-exempt status automatically revoked by the IRS.

4. Submit State Application to Solicit Contributions & Periodic State Filings.
Charitable organizations eligible to receive tax-deductible contributions must abide by state laws established to regulate the solicitation of funds for charitable purposes. Most states, including Florida, have state statutes requiring organizations to first register with a state agency before soliciting for contributions in that state. Florida’s Solicitation of Contributions Act requires organizations to submit an application to the Florida Department of Agriculture and Consumer Services and also requires annual renewals.

To determine in what states you may be required to register to solicit contributions, see the National Association of State Charity Officials website. It is also important to keep in mind that charitable organizations must register in any state in which they plan to solicit funds, not just their home state.

Most states, including Florida, also require charitable organizations to file periodic financial report forms. Although most states accept a copy of the Form 990 in place of all or part of their financial report forms, additional information may be required.

Although the number of nonprofits continues to increase, philanthropic giving still lags pre-recession levels and the Nonprofit Finance Fund’s 2014 State of the Sector Survey reported the majority of nonprofits surveyed have less than 3 months of operating cash in hand. What does this mean to a new nonprofit? Many industry assumptions are extrapolated from statistics, but one thing is certain: starting a charitable organization not only requires a strong commitment to carrying out the mission, but also requires savvy business management and operational skills. Paying close attention to your nonprofit status, financial and operational controls, and all business matters will help new and existing nonprofits become healthy nonprofits.

*Form 1023-EZ is a new shorter and streamlined exemption application that was released by the IRS in July 2014. The Form 1023-EZ is 3 pages as compared to the 26 pages in the standard Form 1023. Most organization with gross receipts of $50,000 or less and assets of $250,000 or less are eligible. The EZ form must be filed electronically and no additional documentation is required to be submitted with the application.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.