Obtaining 501(c)(3) tax exempt status in California involves a long process. You must fill out several applications with state and federal agencies, in addition to paying hefty application fees. Fortunately, once your nonprofit obtains its tax exempt status, it no longer has to pay income taxes. Your nonprofit will be required to keep and submit several forms to the IRS on an annual basis to maintain its tax exempt status. Once you have set up your California nonprofit and obtained your 501c3 tax exemption, maintaining tax exempt status is a critical, ongoing process that your nonprofit will need to properly pay attention to.
Requirements for Maintaining Tax Exempt Status for California Nonprofits
Keep Accurate Corporate Records
Keeping tax exempt status requires all nonprofits to keep accurate corporate records. In order to protect their nonprofit tax exempt status, nonprofit corporations are required to maintain accurate and up-to-date administrative and financial records such as annual financial statements, any revisions/amendment to the articles of incorporation or bylaws, IRS tax exempt determination letters, and state exemption letters. Corporate records also include meeting minutes of board and directors meetings and any documentation of important decisions made during such meetings. Keeping excellent records is the first step of protecting tax exempt status for a nonprofit organization.
Maintain a Tax Exempt Purpose
In order to receive and maintain a tax exempt status, your nonprofit must operate in accordance with a tax exempt purpose identified in your initial 501(c)(3) application. You must notify the IRS if you make any changes to your tax exempt status.
Limit Lobbying Activities
Tax exempt nonprofits are required to maintain limited lobbying activities. If a 501(c)(3) tax exempt nonprofit influences legislation to any “substantial degree,” it will face the loss of their nonprofit status. If your nonprofit engages in lobbying activities, make sure it does so in accordance with the IRS monetary limits.
In addition to limiting lobbying activities, nonprofits are also restricted from donating/contributing money to political campaigns. If such activity occurs, the IRS can exercise a tax against the nonprofit and its managers in addition to removing its 501(c)(3) status. Make sure you limit lobbying activities and refrain from making political contributions in order to maintain your California nonprofit tax exempt status.
Do Not Distribute Profits to Members, Officers, or Directors
Your nonprofit’s income must be used for charitable purposes and not to compensate members, officers, or directors directly or indirectly. If your nonprofit decides to do business with a member, officer, or the director, the business activity must be disclosed to the board of directors and the board must approve any transactions.
Submit Annual Reporting Obligations
Though your California nonprofit may be tax exempt from paying federal and state income taxes, it still must maintain financial documents related to business activities. Nonprofits are required to file Form 990, the Return of Organization Exempt From Income Tax, Form 990-EZ, Short Form Return Organization Exempt From Income Tax, or submit Form 990-N, Electronic Notice for Tax-Exempt Organizations not required to file Form 990 or 990-EZ. The type of form that you must file on an annual basis will depend on your nonprofit’s annual gross receipts and the value of its assets. You must file this form on an annual basis to protect your California nonprofit tax exempt status. Note, certain public charities such as churches may not need to file Form 990. Also, if your nonprofit is exempt from state income taxes, you may be required to file additional forms on an annual basis to preserve the status. Contact us for more information.
Pay Taxes on Income From “Unrelated Activities”
If your nonprofit engages in business outside its tax exempt purposes and obtains income while doing so, income taxes must be paid on the earned income. The income producing activity must meet three conditions in order to be considered taxable:
- The activity must be a trade or business.
- The trade or business must be regularly carried out.
- The trade or business activity must not be substantially related to an organization’s exempt purpose.
Keeping Tax Exempt Status
Although it may appear easy for a nonprofit organization to maintain its tax exempt status, unfortunately it also can be just as easy to lose its tax exempt status. Every year the Internal Revenue Service revokes the tax exempt status of hundreds of nonprofit 501(c)(3) organizations and public charities. Some revocations are simply due to the nonprofit organization failing to file the required annual information return or notice with the IRS for three consecutive years. For detailed information on keeping your nonprofit tax exempt status, the Compliance Guide for 501(c)(3) charities is a great resource.
Let A People’s Choice Help You With Protecting Tax Exempt Status
Contact A People’s Choice if you would like assistance maintaining tax exempt status for your California nonprofit organization. We can assist you in preparing annual forms to submit to the IRS to protect your California nonprofit tax exempt status.