Government Tax Guide for the Non-Profit Organizations (NPO)
Non-profit organizations (NPOs) are dedicated to making a difference in education, healthcare, and social welfare. To help them focus on these missions, the government offers tax exemptions, giving nonprofits a bit of breathing room financially so they can put more resources into their work. But along with these benefits come specific tax rules that nonprofits must follow to keep these exemptions and stay compliant.
This guide breaks down the essential tax guidelines, sales tax requirements, and compliance steps every nonprofit should know. By staying on top of their tax responsibilities, nonprofits can keep doing their best, positively impacting our communities.
Sales Tax Obligations for Nonprofits
Understanding sales tax obligations can be challenging for nonprofits since rules vary by state. While some states exempt mission-related transactions, others require nonprofits to collect sales tax on certain goods or services. Knowing when sales tax applies—and when it doesn’t—helps nonprofits stay compliant, avoid penalties, and focus on their mission.
For additional support in maintaining compliance, specialized accounting and bookkeeping services can be invaluable.
State-by-State Sales Tax Exemption Chart
Different types of sales may or may not be subject to sales tax, and these distinctions often hinge on state regulations and the nature of the sale. Generally, nonprofits should pay close attention to the type of transaction and its relevance to their mission, as these factors can impact tax requirements. Strategically handling taxable events, especially in fundraising, can help nonprofits remain efficient while maximizing engagement.Here’s a more– detailed look at how sales tax might apply:
- Goods: When nonprofits sell physical items, like T-shirts, mugs, or other merchandise, sales tax is often required. For example, if an NPO sells branded merchandise to fundraise, many states see this as taxable. While some states offer exemptions for occasional sales or mission-related items, it’s common for nonprofits to collect and remit sales tax on these transactions.
- Services: Sales tax may also apply to service-based activities. For instance, if a nonprofit offers paid classes, workshops, or other educational services, certain states might require tax on these fees, depending on how closely the service aligns with the nonprofit’s core mission. Some states provide exemptions if the service directly supports the nonprofit’s purpose; others do not, meaning it’s essential for nonprofits to check their specific state guidelines.
- Fundraising Events: Fundraising activities add an extra layer of complexity. In some states, ticket sales for fundraising events, such as charity dinners, auctions, or raffles, may be subject to sales tax. However, certain exemptions might be available for occasional events, especially if the proceeds directly support the nonprofit’s mission. For example, states often allow one-time or annual fundraising events to be exempt from sales tax as long as they are infrequent and mission-focused. Understanding the specific regulations can help nonprofits ensure they are collecting tax only when required.
State-by-State Sales Tax Exemption Chart
State | Sales Tax Exemption Details |
Alabama | Most nonprofits do not qualify for a sales tax exemption; application through Alabama Department of Revenue (ST: EX-A1 form) |
Alaska | Not applicable; no state-level sales tax |
Arizona | No general exemption; limited exemptions available for specific activities (Arizona Department of Revenue) |
Arkansas | Charitable sales may qualify under certain conditions (SSTGB Form F0003) |
California | Limited exemption for specific organisations like youth and veteran groups |
Colorado | Exemption available for nonprofits with IRS determination letter (DR 0715) |
Connecticut | Automatic exemption with IRS determination letter |
Delaware | Not applicable; no state-level sales tax |
District of Columbia | Sales tax exemption for qualified nonprofits with local office (online application) |
Florida | Limited exemptions for certain not-for-profits on specific purchases (Form DR-5) |
Georgia | Limited exemptions available, primarily for specific organizations (e.g., nursing homes) |
Hawaii | No sales tax; general excise tax (GET) exemptions available (Form G-6) |
Idaho | Most nonprofits do not qualify; some exemptions for specific groups |
Illinois | Sales tax exemption application online with IRS determination letter |
Indiana | Sales tax exemption form NP-20 due within 120 days of incorporation |
Iowa | Limited exemptions; primarily applies to educational, religious, or charitable sales |
Kansas | Not all 501(c)(3) organisations qualify; exemption application available online |
Kentucky | Sales tax exemption for nonprofits with IRS determination letter (Form 51A125) |
Louisiana | General exemption not available; exemptions possible for fundraisers with Form R-1048 |
Maine | Exemption applications are form-specific depending on organisation type |
Maryland | Requires IRS determination letter and state application |
Massachusetts | No application form; submit IRS letter and explanation |
Michigan | Automatic exemption with IRS determination letter; present Form 3372 to vendors |
Minnesota | Requires exemption application (Form ST16) |
Mississippi | Few exemptions; specific activities may qualify |
Missouri | Application required (Form 1746) for exemption from sales tax |
Montana | Not applicable; no state-level sales tax |
Nebraska | Exemption not guaranteed for all nonprofits (Form 4 required) |
Nevada | Application required for qualified organisations (Form APP-02.01) |
New Hampshire | Not applicable; no state-level sales tax |
New Jersey | Requires Form REG-1E for exemption |
New Mexico | No sales tax; gross receipts tax exemptions available under specific conditions |
New York | Application required (Form ST-119.2) |
North Carolina | No sales tax exemption; semiannual refunds available (Form E585) |
North Dakota | Limited sales tax exemptions available |
Ohio | Automatic exemption with IRS determination letter; present Form STEC-B to sellers |
Oklahoma | Requires Form 13-16-A; exemptions limited to specific types of nonprofits |
Oregon | Not applicable; no state-level sales tax |
Pennsylvania | Requires Form REV-72; renewal required every five years |
Rhode Island | Application required (Form EXO-APP) |
South Carolina | Exemptions limited to specific items for resale; requires Form ST-387 |
South Dakota | Limited permit-based exemptions; application required |
Tennessee | Exemptions available for in-state nonprofits only (Form RV-F1306901) |
Texas | Sales tax exemption for qualifying nonprofits (Form AP-205-2) |
Utah | Application required for certain institutions (Form TC-160) |
Vermont | Automatic exemption with IRS determination letter; present Form S-3 to vendors |
Virginia | Requires application for exemption (Form NP-1) |
Washington | Generally no sales tax exemption; limited exemptions for fundraising activities |
West Virginia | Requires multi-state Form F0003; specific to in-state nonprofits |
Wisconsin | Requires Form S-103 for sales tax exemption certificate |
Wyoming | Submit IRS determination letter for exemption approval |
Federal Tax Obligations for NPOs
Non-profits in the United States are typically eligible for substantial tax benefits, especially at the federal level. These benefits, including income tax exemptions, allow NPOs to allocate more resources to their charitable activities.
Federal Tax Exemption Eligibility for Nonprofits
Federal tax exemption status is granted to NPOs that meet the IRS’s 501(c)(3) criteria, which primarily focus on the organization’s purpose, activities, and financial accountability. Federal tax exemption is not automatic; NPOs must apply and receive approval from the IRS. Many nonprofits rely on grants and funding options that align with compliance needs and support their mission.
Steps and Criteria for Federal Tax Exemption:
- Purpose Requirement: To qualify as a tax-exempt organization, the NPO must serve a recognized purpose, such as charitable, educational, scientific, religious, or literary. This purpose must be clearly stated in the organization’s governing documents, such as its articles of incorporation.
- Non-Profit Activities: The NPO must align with its stated purpose and should not significantly deviate into profit-oriented activities. Political involvement and lobbying activities are highly restricted and may disqualify the organization from tax-exempt status if conducted extensively (https://www.irs.gov/charities-non-profits/lobbying).
- Application Process: To receive federal tax exemption, NPOs submit either IRS Form 1023 or the streamlined Form 1023-EZ (for smaller organizations with gross receipts of $50,000 or less). The application involves a detailed overview of the organization’s structure, mission, programs, and financial information.
- IRS Determination Letter: Upon approval, the IRS issues a determination letter, which officially designates the organization as tax-exempt. This letter serves as proof of exemption and is essential for grant applications, tax filings, and donor contributions. The IRS may conduct periodic reviews, so NPOS need to maintain transparency and compliance with federal guidelines.
- Annual Filing Requirement: Even tax-exempt NPOs must file annual informational returns with the IRS, typically using Form 990), 990-EZ, or 990-N, depending on their gross receipts and assets. This form provides transparency on financial activities, ensuring that funds are used appropriately and according to the organization’s mission.
Unrelated Business Income Tax (UBIT)
While federal tax exemption applies to most mission-related income, the IRS imposes an Unrelated Business Income Tax (UBIT) on income generated from activities that are not directly related to the organization’s exempt purpose. UBIT aims to prevent NPOs from having an unfair advantage over for-profit businesses by ensuring that unrelated income is taxed similarly.
Common Sources of Unrelated Business Income:
- Retail Sales of Non-Mission-Related Items: For example, if a non-profit arts center sells merchandise unrelated to its programs, such as general apparel, the income may be subject to UBIT.
- Rental Income from Unrelated Tenants: If an NPO owns a property and rents it to a business without connection to the NPO’s mission, this income might be considered unrelated.
- Advertising Revenue: Advertising revenue on an NPO’s website or in its publications could qualify as unrelated business income unless it aligns closely with the organization’s mission.
Exceptions to UBIT: Certain types of income are excluded from UBIT, including:
- Volunteer-Operated Activities: Income from activities where substantially all work is performed by volunteers.
- Sale of Donated Items: For example, income from the sale of donated goods in a thrift store run by a non-profit is generally exempt.
- Qualified Sponsorship Payments: Payments from sponsors where the sponsor receives no substantial benefit other than name recognition.
If an NPO generates unrelated business income, it must file Form 990-T with the IRS to report and pay taxes. This filing helps the IRS monitor that NPOs are not primarily engaged in profit-driven activities and remain focused on their exempt purposes.
Filing Requirements and Deadlines for Nonprofits
Non-profit organizations must meet certain filing requirements to maintain compliance with federal and state regulations. These filings are an essential transparency tool for stakeholders, donors, and regulatory bodies, showing how the organization uses its resources. Staying updated on sector-wide trends in nonprofit reporting can support transparency and encourage continued donor trust. Understanding the required forms and their deadlines is crucial to avoid penalties and maintaining tax-exempt status.
IRS Form 990 Series Explained
The IRS Form 990 series is essential for reporting an NPO’s financial activity, governing structure, and program operations. Depending on a non-profit’s size and annual income, the IRS offers different forms within the Form 990 series, allowing each organization to file according to its complexity and capacity.
1. Form 990-N (e-Postcard)
Form 990-N also known as the “e-Postcard,” is for smaller non-profits with gross receipts of $50,000 or less annually. This form requires minimal information, making it easy for smaller organizations to file while meeting federal compliance.
Key details required in Form 990-N:
- Organization’s name and mailing address
- Employer identification number (EIN)
- Tax year
- Confirmation of annual gross receipts below $50,000
- Statement indicating the organization’s continued eligibility as a tax-exempt entity
Form 990-N is only filed electronically and doesn’t require extensive financial data, making it an accessible option for smaller non-profits to stay compliant without a large administrative burden.
2. Form 990-EZ
Form 990-EZ is intended for mid-sized non-profits with gross receipts between $50,000 and $200,000 and total assets under $500,000. This form provides more detail than the e-Postcard but is simpler than the full Form 990.
Information required in Form 990-EZ:
- Statement of revenue, expenses, and changes in net assets
- Brief descriptions of the organization’s main activities and programs
- Compensation of officers, directors, and key employees
- Balance sheet details, including assets and liabilities
This form offers a balance for mid-sized non-profits by requiring enough financial detail to ensure transparency without the full complexity of Form 990.
3. Form 990
Form 990 is designed for large non-profits with gross receipts over $200,000 or assets over $500,000. It is the most comprehensive of the forms in the 990 series, requiring detailed financial and operational information that provides an in-depth look into the organization’s structure, governance, and financial management.
Key sections in Form 990:
- Mission Statement and Program Services: Overview of the organization’s purpose, programs, and how they align with its mission.
- Detailed Financial Reporting: Includes a statement of revenue and expenses, a balance sheet, and an analysis of financial positions.
- Compensation Information: Includes salaries of top officers, directors, and highly compensated employees, which helps ensure accountability in the organization’s spending.
- Governance and Policies: Detailed questions about the organization’s governance, policies on conflicts of interest, whistleblower policies, and executive oversight practices.
- Schedule Attachments: Additional schedules may be required depending on the organization’s activities, such as Schedule B for contributions or Schedule J for executive compensation.
Form 990 provides a thorough, transparent overview of an organization’s finances, mission, and governance, which is valuable for the IRS, donors, and public stakeholders.
Filing Deadlines and Penalties
To remain compliant, NPOs must submit their Form 990 on time, which is due by the 15th day of the 5th month after the close of the organization’s fiscal year. For NPOs that use a calendar year, this deadline typically falls on May 15 each year. However, NPOs that operate on different fiscal years will have different deadlines. See the IRS Filing Due Dates for exact deadlines and filing requirements.
Extensions
The IRS allows NPOs to file Form 8868 to request an extension if they cannot meet the initial deadline. This form grants an automatic 6-month extension, giving organizations more time to prepare and review their filings if needed.
Penalties for Late Filing and Non-Compliance
Timely filing is critical because missing deadlines can result in significant penalties, including both financial consequences and potential loss of tax-exempt status.
- Late Filing Penalties for Small and Large Organizations:
- For smaller organizations (gross receipts less than $1 million), the penalty is $20 per day for each day the form is late, with a maximum penalty of $10,000 or 5% of gross receipts, whichever is less.
- For larger organizations (gross receipts over $1 million), the penalty is increased to $105 per day, with a maximum penalty of $54,000.
- Loss of Tax-Exempt Status:
- An organization must file Form 990 (or 990-N/990-EZ as applicable for three consecutive years to avoid losing its tax-exempt status. The IRS revokes the status, and the organization must reapply using Form 1023 or Form 1023-EZ and pay the associated fees. Learn more about reinstating tax-exempt status.
- Public Disclosure Requirements:
- In addition to filing with the IRS, NPOs must make their Form 990 available for public inspection through their website or by providing copies upon request. Transparency in filing helps maintain donor confidence and supports the organization’s reputation. For more on public disclosure.
Why Nonprofits Are Tax-Exempt
Non-profits receive tax-exempt status because their work is considered beneficial to society. The government provides tax exemptions to support organizations that address public needs, such as education, health, poverty relief, environmental protection, and the arts. By lowering the financial obligations of non-profits, the government enables these organizations to direct more resources toward achieving their goals.
To qualify as tax-exempt, an NPO must serve an eligible purpose, such as charitable, religious, educational, scientific, or literary. This classification ensures that tax-exempt organizations genuinely contribute to the public good rather than pursuing commercial interests. However, while mission-related revenue is often exempt from taxes, non-profits must still follow specific IRS rules and may owe taxes on income derived from unrelated business activities.
Benefits of Tax Exemption for Nonprofits
Tax exemption offers multiple advantages, allowing non-profits to maximize their impact. Here are some key benefits:
- Increased Funding: Tax-exempt status makes non-profits eligible for tax-deductible donations from individuals and corporations. For donors, these contributions reduce their taxable income, which often encourages more significant contributions.
- Reduced Operating Costs: Tax-exempt NPOs do not have to pay federal income taxes on revenue directly related to their mission. This means more of their income can be directed toward essential programs, expanding services, and fulfilling their mission without the added pressure of income tax costs.
- Access to Grants and Public Funding: Many government agencies and private foundations provide grants exclusively to tax-exempt organizations. Obtaining tax-exempt status often allows NPOs access to these essential funding sources, which can be critical for expanding their services and reaching more needy people.
- Sales and Property Tax Exemptions: Many states offer additional sales and property tax exemptions to tax-exempt organizations besides federal tax benefits. For example, a state may exempt certain non-profits from paying sales tax on goods and services purchased for their mission or property tax on facilities used for public benefit. This further reduces operational costs, allowing the organization to allocate more of its budget toward its programs.
- Enhanced Credibility and Public Trust: Tax-exempt status gives non-profits greater credibility, as it signals that the organization has met stringent IRS standards and operates in a manner that benefits the public. Many donors and grantmakers are more likely to support organizations that have received tax-exempt status due to the transparency and accountability that come with IRS approval.
These benefits help non-profits sustain and expand their operations, supporting a stronger, more resilient community.
Tax Filing Checklist for Nonprofits
A checklist can help non-profits stay organized and ensure all steps are completed accurately and on time. This checklist serves as a practical guide for the tax-filing process, from choosing the correct form to preparing supporting documents.
- Determine the Correct Form: Based on the organization’s gross receipts and total assets, select the appropriate form (990-N, 990-EZ, or 990).
- Form 990-N is for organizations with gross receipts under $50,000.
- Form 990-EZ is for organizations with receipts between $50,000 and $200,000 and assets below $500,000.
- Form 990 is for organizations with gross receipts over $200,000 or assets over $500,000.
- Compile Financial Statements: Gather income, expense, and asset statements for the fiscal year. This documentation provides the foundation for completing Form 990 and ensuring all financial data is accurate.
- Review Program Accomplishments: Prepare a brief overview of the organization’s accomplishments and how funds were used to support its mission. This information is typically required on Form 990 and helps showcase the impact of the organization’s work.
- Document Compensation of Officers and Key Employees: Ensure transparency by recording the compensation of top officers, directors, and key employees, as required by Form 990. This section helps demonstrate that funds are used responsibly.
- Check for Unrelated Business Income (UBI): Determine if any income from activities unrelated to the NPO’s mission is taxable. Use the IRS’s UBIT guidelines to confirm if UBIT applies.
- File State-Specific Forms or Renewals: Review state-specific requirements for non-profits, including any necessary forms for state tax exemptions, registration renewals, or sales tax exemptions.
- Submit Form 990 on Time: The IRS requires Form 990 to be filed by the 15th day of the 5th month after the fiscal year-end (e.g., May 15 for a calendar-year organization). Late filing can result in penalties, and three consecutive years of missed filings will lead to automatic revocation of tax-exempt status.
- Public Disclosure Compliance: Make the Form 990 available to the public, either on the organization’s website or upon request. Transparency with Form 990 helps build trust with donors and the public.
Following this checklist can help non-profits streamline their tax filing process, avoid penalties, and meet the transparency requirements expected of tax-exempt organizations.
Conclusion
Understanding and meeting tax obligations is impotant for non-profits to retain their tax-exempt status, stay compliant, and avoid penalties. By utilizing the resources listed in this guide, non-profits can effectively manage their tax responsibilities. Keeping accurate records, meeting filing deadlines, and maintaining transparency help ensure the organization’s focus remains on its mission and that it can continue serving the community without interruptions.
Empower Your Nonprofit: Stay Compliant and Build Your Impact with Charity’s Purse
Keeping your nonprofit compliant is essential for maximizing impact and securing donor trust. Use our comprehensive tax guide to navigate tax obligations confidently, make informed financial decisions, and maintain your tax-exempt status—allowing you to focus on what truly matters: serving your community.
Ready to boost your nonprofit’s visibility? Explore Charity’s Purse for a free 5-page website to kickstart your marketing journey and help your organization make a powerful first impression!
FAQs
1. What tax forms do nonprofits need to file?
Nonprofits file Form 990, 990-EZ, or 990-N depending on revenue and assets. These forms ensure tax-exempt compliance, with Form 990 for large, 990-EZ for mid-sized, and 990-N (e-Postcard) for small nonprofits. Filing accurately each year builds transparency and donor trust. Nonprofits should keep thorough records to simplify annual reporting.
2. Do nonprofits have to charge sales tax?
Sales tax rules vary by state. Some nonprofits may be exempt for mission-related sales, but others might need to collect tax on merchandise, services, or fundraising events, depending on state laws. Verifying local regulations is key to maintaining compliance. Consulting with state tax authorities can clarify specific obligations.
3. What is Unrelated Business Income Tax (UBIT)?
UBIT applies to income from activities not aligned with a nonprofit’s mission, like unrelated merchandise sales or rental income. Nonprofits report UBIT on Form 990-T to comply with IRS rules. This tax ensures fair competition with for-profit businesses. Proper tracking of income sources helps nonprofits meet UBIT requirements.
4. How do nonprofits apply for tax-exempt status?
Nonprofits apply for 501(c)(3) status using IRS Form 1023 or the shorter Form 1023-EZ. Approval grants tax exemption, enabling nonprofits to receive tax-deductible donations and other tax benefits. A determination letter confirms this status officially. Keeping a copy of this letter helps with grant applications and public transparency.
5. What if a nonprofit fails to file Form 990?
Missing Form 990 for three consecutive years results in loss of tax-exempt status. This affects donor deductibility, requires reapplication, and can incur penalties, so timely filing is crucial. Compliance helps retain trust and supports long-term stability. Nonprofits can file for an extension if more preparation time is needed.