Having proper due diligence when it comes to IRS regulations will minimize the legal liability of board members. Having a financial committee on your board or a 3rd party accounting service can help you to keep up with the records. Board members should have an understanding of IRS regulations and limitations under Section 501(c). Abiding by these regulations, along with filing proper documents, will help an organization stay in compliance with IRS tax-exempt status.
How Are Nonprofits Monitored, Regulated, and Governed?
Nonprofits can occur damage caused by fraudulent solicitors, financial improprieties, as well as executives and crooked board members. Nonprofits can engage in revenue-generating activities that result in annual surpluses or profits. Nonprofits must reinvest surpluses back into the organization and its tax-exempt purpose. Excess revenues may not be distributed to individuals affiliated with the organization.
Ideally, the founders and/or persons who oversee the operation of your Nonprofit serve as its board members. In most states, one person may serve as the sole director for incorporation purposes. However, when submitting a 501(c)(3) application or another type of tax-exempt application, the IRS almost always requires at least three distinct individuals to serve on the board of directors.
Is My Organization Tax Exempt Once I File My Nonprofit Articles of Incorporation?
No. Nonprofit status is granted by your state but tax-exempt status is granted at the federal level by the IRS. You must complete a separate IRS application to be granted tax-exempt status at the federal level.
Can I Still Be A Nonprofit If I Don’t Apply For Tax Exempt Status?
Yes, you are a nonprofit corporation once you are filed with the state. However, your corporation will still be liable for federal (and possibly state) income taxes. Donations made to your nonprofit will not be tax deductible without tax-exempt status. Further, it may also be difficult to obtain grants if you are not a 501(c)(3) organization.
Does the IRS Require Salary Information for Tax-exempt Status Applications?
The IRS wants to know what percentage of the overall budget is devoted to salaries. If salaries are large, the IRS may determine the Nonprofit is actually benefiting the salaried directors, not the Nonprofit’s programs. The IRS wants to see how much each board member is paid. Nonprofit applications must justify why these directors are being paid this amount. If the amount is too high, the IRS will probably ask you to provide justification for the salaries.
People who are being paid by the Nonprofit are also considered “interested” persons. If a majority of the board members are compensated, the IRS perceives a risk of pay increases spiraling out of control.
How Much Does It Cost to Submit My Tax Exempt Status Application to the IRS?
The IRS charges a one time fee to review and approve your application. The filing fee is based on your projected budget. If you expect annual revenues of $10.000.00 or less in your Nonprofit’s first three years, the filing fee will be $275.00. For an organization whose projected revenues exceed $10.000.00 per year, the filing fee will be $600.00. The IRS may still ask you to pay the higher filing fee based on their review of your budget and proposed activities. If your budget and activities do not match, the IRS will instruct you to revise and resubmit your application with the higher filing fee.
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