Nonprofit Tax Exemption Status

Does Your Nonprofit Need Tax Exemption Status?

Nonprofits are eligible for tax exemption status since nonprofits do not seek to make money for the purpose of enriching themselves.

How Does A Nonprofit Maintain Tax Exempt Status?

You must submit your annual financial reports to the IRS and the California Franchise Tax Board.  The board of directors should review the corporation’s annual IRS and State filings before submitted.  Often, the nonprofit will retain an independent accountant to conduct a review of the organization’s financial statements and issue a report to the board of directors, which is a less expensive alternative to obtaining a complete audit.  The nonprofit should hire a professional accountant to help implement a fiscal management system, addressing issues such as dual-signature requirement on bank accounts, regular review of monthly statements by the board, and an annual audit.  The local chapter of the American Institute of Certified Public Accountants (AICPA) or the California Board of Accountancy’s Clearinghouse for Volunteer Accounting Services (CVAS) may be contacted for information on accountants who may provide free services or reduced-cost services to nonprofits.

Pursuant to California Government Code section 12586, referred to as the Nonprofit Integrity Act of 2004, a charitable organization with gross revenue of two-million dollars ($2,000,000.00 USD) or more must obtain independent audits and appoint an audit committee.  The audited financial statements must be available for inspection.

At any time during the existence of the nonprofit organization, the IRS or the California Franchise Tax Board may audit the organization to determine tax liability, penalties, or revocation of tax-exempt status.

Informational Returns: IRS Form 990 and California FTB Form 199/199/N

Public Charities must submit annual filings to the IRS, including IRS Form 990 or 990-EZ (Return of Organization Exempt from Income Tax) and accompanying Schedule A within four-and-a-half (4 ½) months following the close of the organization’s tax year.  This is the organization’s informational return stating its finances and activities.  Certain organizations are exempt from this filing requirements, such as churches and organizations with annual gross receipts of $50,000.00 or less (except for Private Foundations).  Rather, such organizations must file Form 990N, which is an annual electronic notice form.  Private Foundations must file the more rigorous Form 990PF regardless of their gross receipts.

The California equivalent for the annual exempt organization return is FTB Form 199 and 199N.

Unrelated Business Income Tax Returns: IRS Form 990T and California FTB Form 109

An organization that has annual gross incomes of one-thousand dollars ($1,000.00 USD) or more from unrelated trade or business activities must file IRS Form 990T Exempt Organization Business Income Tax Return in addition to the annual informational return. The unrelated business income will be taxed at the same rate as the standard corporation Federal income tax.  Moreover, if the organization has a significant amount of unrelated business income, the IRS may determine that the organization is spending a substantial amount of time on non-exempt activities and investigate its tax exemption status.

The California equivalent for the unrelated business income return is FTB Form 109.

Additional California Requirements

In California, the Statement of Information by Domestic Nonprofit Corporation with a $20.00 fee must be submitted to the Secretary of State every two (2) years. Failure to comply will lead to penalty charges.

In addition, every Nonprofit Public Benefit Corporation must register the Attorney General’s Registry of Charitable Trusts within thirty (30) days of receiving its first assets.  The initial registration form is Form CT-1.  The corporation must file the Registration Renewal Fee Report Form RRF-1 with the registry every year.  Nonprofit corporations with revenues of more than $25,000.00 during the preceding fiscal year must pay an annual registration fee based on a sliding scale.  Also, all IRS Form 990, 990EZ, 990N, or 990PF, and schedules must submit to the Attorney General.

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