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Tax Exemption Requirements for Nonprofit Organizations

Firstly, let’s learn what it means to be a non-profit organization and staying tax-exempt. In any type of society, there are certain rules that every citizen has to follow without fail. The reason to follow all the rules and regulations and their creation is to help run everything smoothly. Maintaining all these rules certainly benefits every individual in a lot of ways. Similarly, organizations, institutions, and corporates are part of this community as well. This means they also have to follow the same rules and regulations, just like private citizens.

These firms may be small or huge depending on their size and capital, but they have to pay the taxes based on the tax regulations. Form 990N is basically a type of IRS (Internal Revenue Service) form that every organization whose annual income is less than $50,000 can file their annual reporting need by electronically submitting this form. If not, they can opt for Form 990 or Form 990-EZ, depending on their reporting structure.

Most of the non-profit tax-exempt institutions have to file their annual tax returns within the IRS jurisdictions. Even though these organizations don’t pay their federal taxes, most of them have to file this in order to set up an information structure with the IRS. This type of annual reporting return is known as Form 990. This form came into existence in the year of 2006 as per the Pension Protection Act when there were concerns raised as the most of the small non-profit organizations were acting under the radar.

Before this act, they need not have to file any kind of tax returns as their annual income was below the level of threshold, it was difficult for the government to identify if the organization has changed its address, purposes or is still in business or not. Congress made this compulsory upon realizing this and every organization was asked to file this form even if their annual income was below the threshold.

What happens when you don’t file this form?

If you fail to submit this form by the end of the year, there will be a potential chance that you may lose your tax exemption. Hundreds of small organizations (non-profit specifically) would have lost their exemptions because of not filing this. IRS reminds you every single time you miss filing it and after 3 times of sending the reminder, if you still miss it then you will tend to lose your tax-exempt status on the third year. This revocation happens automatically.

By revocation, it means that you will no longer be eligible for the federal tax exemption and you will not be able to promise your donors that their donations will include tax in it. This will in return hamper your business and will have allegations amongst your shareholders as everyone in the market expects every firm to be a tax-exempt firm for them to donate or invest in any activities. Hence missing on filing one form will directly or indirectly hamper to the businesses you run.

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