Do Nonprofits Pay Taxes in Ohio?

Unlike businesses, nonprofit organizations are entities that exist for a reason other than making a profit for their owners. Instead, nonprofit organizations are created to provide a benefit to the community, the general public, or a specific group of beneficiaries. So, the question is, do nonprofits pay taxes?

There are many different types of nonprofits, but the kind most people think of when they hear “nonprofit” is a charitable organization or religious organization, or a similar 501(c)(3) organization, so called because of the section of the tax code that exempts such entities from paying taxes if they comply with requirements. Other sections of the tax code apply to other types of nonprofits, making them tax-exempt as well.

However, just because a nonprofit may be exempt from paying taxes doesn’t mean that it is exempt from filing tax forms. Filing taxes for a nonprofit is critical to the organization maintaining its nonprofit status. If you are serving in the leadership of a nonprofit, you need to understand the organization’s tax filing obligations.

Do Nonprofits Pay Taxes?

Most nonprofits are tax-exempt, but it’s useful to understand the distinction between the two terms. “Nonprofit” describes an organization’s incorporation status under state law. “Tax-exempt” refers to whether a qualifying organization meets the requirements to be exempt from taxes under the federal Internal Revenue Code. It is possible for an organization to be organized as a nonprofit, but not to comply with IRS requirements for tax-exempt status.

Being tax-exempt allows a nonprofit to use the revenue it receives to further its stated purpose, whether that is operating a church, helping cancer survivors, nonpartisan voter registration, or running a community center. In the last ten years, hundreds of thousands of nonprofits in the United States lost their tax-exempt status for failure to file taxes, which dramatically reduced the resources available to fulfill their organization’s purpose.

What is a Nonprofit Tax Return?

Most, though not all, nonprofits are required to file an informational tax return with the IRS. This form is called IRS Form 990. There are multiple versions of this form; which version an organization is required to file depends on its gross receipts and the year of filing. If you are unsure which Form 990 your organization needs to file, speak with a tax professional.

Beyond the question, do nonprofits pay taxes, if they don’t have to pay taxes, why do nonprofits have to file a tax return? Essentially, for transparency purposes. Filing Form 990 allows the IRS to assess the operations of the organization, including its programs and finances. Nonprofits are also required to make their Form 990 available to the public for viewing; many have the form available on their websites.

What Types of Nonprofits Don’t Have to File Form 990?

Some categories of nonprofits are not required to file a Form 990. They include:

  • Most faith-based organizations, like churches, religious schools, and missionary groups
  • Subsidiaries of another nonprofit organization, if covered under the filing for the parent organization
  • State organizations offering essential services
  • Certain government corporations

The IRS publishes a list of organizations that are exempt from filing Form 990.

When is Form 990 Due?

That depends on the nonprofit’s taxable year. The rule is that Form 990 is due on the 15th day of the fifth month following the end of the organization’s taxable year. If your organization’s taxable year ends on September 30, your Form 990 would be due on February 15.

What Happens if a Nonprofit Fails to File a Form 990?

The IRS automatically revokes the tax-exempt status of a nonprofit that fails to file the required Form 990 for three years in a row. What’s more, there is no appeals process for these automatic revocations, which means that an organization that is unaware of its filing obligations could find itself unexpectedly stripped of its tax-exempt status with little recourse. The organization may have to re-apply for tax exempt status.

In addition to the nonprofit losing tax-exempt status, any donations to the nonprofit would no longer be tax-deductible to the donor. So, not only would the organization have to pay taxes, it might well receive fewer donations—a financial double-whammy. The ponderance of do nonprofits pay taxes could be a far fetched question under the circumstance above where the entity doesn’t file a Form 990.

What Happens if a Nonprofit Files the Wrong Form 990, or Files One with Incorrect or Missing Information?

The IRS will return the organization’s filing along with a letter requesting the missing information or missing schedule. If an organization discovers it has filed a form with incorrect information, it can amend its filing by submitting a new form including the correct information and all necessary schedules. The new form must be completed; it cannot contain only the corrected information.

The Bottom Line

Timely filing of the correct tax return with complete and accurate information is essential for your nonprofit organization to keep its tax-exempt status and can finally answer the question to the fullest… do nonprofits pay taxes. To learn more, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.