Tax Compliance Tips for Nonprofit Boards
As a nonprofit organization, tax compliance is essential to maintaining your tax-exempt status and ensuring that your organization can continue to serve its mission successfully. Nonprofit boards play a crucial role in overseeing compliance with tax laws and regulations, and are ultimately responsible for the organization’s financial health. To help nonprofit boards navigate the complexities of tax compliance, here are some important tips to keep in mind.
Understanding Nonprofit Tax Compliance
Nonprofit organizations are exempt from paying federal income tax under section 501(c)(3) of the Internal Revenue Code, as long as they meet certain requirements. To maintain this tax-exempt status, nonprofits must comply with a variety of tax laws and regulations, including filing annual information returns (Form 990), keeping accurate financial records, and following specific rules regarding fundraising activities.
Nonprofit Tax Filing Tips
1. Familiarize Yourself with Form 990: Form 990 is the annual information return that most tax-exempt organizations are required to file with the IRS. It provides key information about the organization’s finances, activities, and governance practices. Nonprofit boards should review Form 990 carefully each year to ensure that all required information is accurately reported.
2. Keep Detailed Financial Records: Good record-keeping is essential for nonprofit tax compliance. Nonprofit boards should maintain accurate and up-to-date financial records, including income and expenses, donations, and grants received. These records are not only necessary for filing Form 990, but also critical for demonstrating accountability and transparency to donors and other stakeholders.
3. Develop a Written Conflict of Interest Policy: Nonprofit boards are responsible for ensuring that all transactions and relationships involving the organization are conducted in the best interest of the organization, rather than for personal gain. Developing and adhering to a written conflict of interest policy can help prevent conflicts of interest and ensure that the organization’s resources are used appropriately.
4. Monitor Fundraising Activities: Nonprofit boards should closely monitor fundraising activities to ensure compliance with state and federal regulations. This includes disclosing any professional fundraisers or fundraising consultants hired by the organization, as well as following specific rules regarding solicitation of donations and receipts issued to donors.
5. Seek Professional Guidance: Nonprofit tax compliance can be complex, and nonprofit boards may benefit from seeking professional guidance from accountants, attorneys, or consultants with expertise in nonprofit taxation. These professionals can provide valuable advice on tax compliance issues, help with preparing Form 990, and ensure that the organization is meeting all necessary legal requirements.
6. Stay Informed About Changes in Tax Laws: Tax laws and regulations affecting nonprofit organizations are constantly evolving. Nonprofit boards should stay informed about any changes in tax laws that may affect their organization and take proactive steps to address these changes. This may include updating policies and procedures, seeking additional training or education on tax compliance, and consulting with legal or financial advisors as needed.
Summary
Nonprofit tax compliance is a critical responsibility for nonprofit boards, and adherence to tax laws and regulations is key to maintaining a nonprofit organization’s tax-exempt status. By understanding the requirements for nonprofit tax compliance, following best practices for tax filing, and seeking professional guidance when needed, nonprofit boards can ensure that their organization remains in good standing with the IRS and continues to fulfill its mission effectively.
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