Keeping and Losing Nonprofit and Tax-Exempt Status

Yes – even after you’ve obtained tax-exempt status, if you don’t follow the rules, you can lose it!

So now that your organization is an official nonprofit tax-exempt 501(c)(3) organization, you’d probably like to keep it that way! After all, you went to a lot of time and trouble and expense go get through the hoops (especially if you did it the hard way, by yourself without any help!) Fortunately, like a lot of things, it’s far easier to keep your organization’s statuses than it is to get them initially.

State Nonprofit and Tax-exempt Status

Maintaining your nonprofit corporation or nonprofit organization is normally as simple as complying with your state’s rules for corporate status, and often that’s just a matter of filing your annual report. Above a certain income level, your state may require and audited financial statement of some sort, but that’s very rare. Most micro-charities never even get close to those limits.  Know when your corporate reports are due. Almost all states let you file those online.

There may be additional state requirements as well. These may include registering to:

1. Collect charitable donations, often called a charitable solicitation registration. In some states, e.g. Tennessee, very small charities are not required to register to make solicitations, but they are required to register for an exemption from registration. Know your state laws.
2. Be exempt from taxes on purchases
3. Pay minimum franchise tax fees
4. Maintain business licenses
5. Pay sales taxes on items the group sells (please note, in many states nonprofit corporations are required to pay taxes on goods sold even if they are exempt from paying taxes on goods they buy!)

If your group messes this up and gets the state nonprofit status revoked, that causes problems with the IRS. You may have to file for reinstatement.

Federal Tax-Exempt Status

Staying in the IRS’s good graces is even easier: stay cool with your state and file your federal tax returns on time. For most micro-charities, this is as simple as logging onto the IRS website and filing a “postcard” report saying that the organization’s income for the previous year. The threshold for the postcard filing changes from time to time but is currently $50,000/year, and that’s averaged over three years.

If you’ve screwed up and missed filing a year or two of returns, don’t panic immediately. (Panic may be required at a later date, but is rarely helpful immediately.)  The IRS has an expedited process for getting the group’s status reinstated.  Check it out here.