Paul Horton: How to Keep Your Nonprofit Tax Exempt Status

When it comes to keeping your nonprofit’s tax exempt status, knowing how to incorporate and operate your organization is crucial. While similar to the processes involved in creating and running a regular corporation, there are key differences which, if not maintained, can strip your organization of its non-profit status. Here you’ll find information about the special rules and requirements that apply to nonprofit corporations.

Make Sure You Comply with All Corporate Formalities

Just like a regular corporation, a nonprofit corporation must have a board of directors in charge of important policy decisions. In addition, there are officers responsible for making decisions regarding the day-to-day running of the corporation. Lastly, depending on the size of the nonprofit corporation, there will be employees that carry out the work.

However, unlike regular corporations, nonprofit corporations do not have shareholders or owners. Because no one person or group owns a nonprofit, it cannot be “sold.” Instead, if the directors of a nonprofit corporation decide that the corporation must be dissolved, they must make arrangements for all of the nonprofit’s assets to be distributed.

Nonprofit corporations can choose to have members with voting rights, although many decide against a membership structure and instead allow their boards to make all decisions. If a nonprofit does have a membership structure, then all of the members participate in major decision making and can, among other things, choose who sits on the board, amend the corporate bylaws, and vote on decisions regarding mergers or dissolutions.

Maintain Corporate Records

Like other corporations, nonprofit corporations must keep detailed and accurate corporate records. If these records are not kept, the limited personal liability status of the directors may be in jeopardy and the organization could lose its tax-exempt status. By definition, good corporate record keeping means maintaining accurate minutes of the meetings of the directors and documenting any important decisions.

After you have all of these records, you should make sure to organize them in an easy-to-manage corporate records book. This book should also contain a copy or the articles of incorporation, bylaws, and tax-exempt status documentation from the Internal Revenue Service (IRS) as well as your state’s tax agency.

Know Your Nonprofit’s Limitations and Restrictions

Equally as important as maintaining detailed and accurate corporate records, your nonprofit corporation must abide by other rules in order to keep and maintain its tax exempt status, some of which are described below.

Your Nonprofit Corporation Cannot Make Monetary Contributions to any Political Campaign — Unlike regular corporations, nonprofit corporations that are tax exempt under 501(c)(3) cannot make contributions to, or participate in political campaigns. If so, the IRS can revoke the corporation’s tax exempt status and asses a special excise tax against the corporation as well as its managers.
Your Nonprofit Corporation Can Only Engage in Political Lobbying in Limited Amounts — If your nonprofit is shown to have influenced legislation to a “substantial degree,” it could face the loss of its tax exempt status. However, nonprofits can participate in the legislative process in a limited way as the IRS sets limits on the money that can be spent on political activities.
Your Nonprofit Cannot Distribute Its Profits to Directors, Officers, or Members — Nonprofit corporations are not allowed to financially benefit their directors, officers, or members. However these individuals are entitled to a reasonable salary and to have their expenses covered.
Your Nonprofit Corporation Must Pay Income Taxes on Profits Unrelated to Its State Purpose or Activities — Nonprofit corporations are only exempt from income taxes on profits that are related to the nonprofit corporation’s charitable activities. However, if the corporation receives profits from unrelated activity, it must pay income taxes on that profit. The IRS requires that a nonprofit corporation pay corporate taxes on any unrelated profits in excess of $1,000.
Your Nonprofit Cannot Receive “Substantial” Profits from Unrelated Activities — If your nonprofit corporation realizes substantial profits from activities unrelated to its purpose, its status could be revoked. Special attention should be paid to unrelated activities that involve a lot of the corporation’s time or which generate substantial income.
Your Nonprofit Corporation Must Distribute All of Its Assets to Another Tax-Exempt Group on Dissolution — Unlike regular corporations, a nonprofit corporation cannot simply be sold. Instead, when the directors decide to dissolve a nonprofit corporation, all of the assets of the corporation must be donated to another tax-exempt group.

Free Consultation with a Utah Non-Profit Lawyer

If you are here, you probably have a business or nonprofit law issue you need help with, call Ascent Law for your free consultation (801) 676-5506. We want to help you.