A Guide to Post-Exemption Compliance
Congratulations – The IRS says your organization is tax exempt! Now what?
Obtaining tax exempt status is just the beginning, not the end of the road for any nonprofit organization. Post-exemption compliance takes organization, focus and time. We have prepared this checklist to help nonprofit organizations comply with some of the federal and state laws and regulations that govern their operations. It is also a good “reality check” for anyone considering forming a new nonprofit. This checklist is a general guide only. It is not a substitute for specific legal advice, and may not be exhaustive, depending on an organization’s operations. This is checklist was created for entities incorporated in Connecticut. If your organization is incorporated in another state, contact StangerLaw LLC for more information.
We have prepared this checklist because your organization obtained a determination from the Internal Revenue Service that it is exempt from tax under Section 501(c)(3) of the Internal Revenue Code. Congratulations! This checklist is a general guide to some of the most common filings required of a charity. It is not a substitute for specific legal advice and is not an exhaustive list
STATE FILINGS – CONNECTICUT
- Annual Report. All corporations incorporated in Connecticut must file an annual report and pay a filing fee with the Secretary of State each year, during the month that the organization was first incorporated. The annual report must be filed online at https://www.concord-sots.ct.gov. Once an organization files online for the first time, and provides an email address, the Secretary of State will send a reminder annually to that email address. Be sure to notify the Secretary of State if the email address changes. At the same website, you can check your organization’s filing status, catch up on back reports by providing the correct information for each year and paying the required filing fee, and verify the officers and directors of the organization as reported in the annual report.
- Attorney General/Consumer Protection Charitable Solicitation Registration. Many organizations that solicit donations in Connecticut, and all that use a professional fundraiser, must register with the Connecticut Attorney General/Department of Consumer Protection (“DCP”), renew the registration annually and pay filing fees. This can be done online at https://portal.ct.gov/DCP/Charities/Charitable-Solicitation-Registration-Information. Registrations must be renewed before the last day of the 11th month following the end of the organization’s fiscal year. Organizations that receive annual contributions of $50,000 or less, religious and parent teacher organizations, accredited educational institutions, and nonprofit hospitals, among others, are exempt from registration, but must make a one-time no fee filing to claim the exemption. This filing can be found at the same website.
- Connecticut Sales Tax – Exemption on Purchases and Collection on Sales. Section 501(c)(3) organizations that have a determination letter from the IRS, or organizations issued a DRS exemption permit before July 1, 1995, are generally exempt from paying Connecticut sales tax. You must present the seller with a copy of your determination letter or DRS exemption permit, attached to a DRS Cert-119. A common misconception is that non-profit organizations do not have to charge sales tax. A nonprofit organization’s sale of property or services is taxable in the same manner as if sold by a for-profit, except in very limited circumstances. Forms and information are available at: https://portal.ct.gov/DRS/Sales-Tax/Tax-Exemption-Programs-for-Nonprofit-Organizations.
- Department of Revenue Services – Reg-1 and 990T. You m a y be contacted by DRS with a request that you complete a Reg-1–Business Taxes Registration Application. The Reg-1 can be completed to indicate that your organization is a non-stock, tax exempt organization and is not subject to business (unless you have employees in Connecticut and will withhold income tax or must collect and pay over sales tax.) You can also file the Reg-1OL (online) before being requested to do so, and this is an important step in making sure that the Connecticut Department of Revenue Services knows that your organization is tax-exempt. The process of filing the Reg-1OL can be started at https://drsbustax.ct.gov/Reg/REGISTRATION.ASPX. (And, yes, this requires the creation of yet another account with ct.gov.) If an organization receives unrelated business income, it must also file a form 990-T with the IRS and a Form CT-990T with the DRS.
- Other Filings – Department of Labor. If you plan to hire employees, there may be other filings, such as with the Connecticut Department of Labor regarding an unemployment registration number. Your payroll administrator (assuming you don’t plan to process payroll yourself) should be able to help you with these filings.
STATE FILINGS – MULTI-STATE OPERATIONS
- If you solicit charitable contributions, maintain an office or employ personnel in other states, you may be required to register to solicit charitable contributions, including online solicitations to residents of another state (or claim an exemption), qualify to do business, file for exemption from state business, income and franchise taxes, maintain an agent for service of process, apply for sales tax exemption, and comply with regulations regarding payroll taxes and unemployment compensation in those states. Consult counsel to discuss these issues if you plan to operate or solicit contributions outside of in Connecticut.
- Tax Exempt Status. IRS Publication 4221-PC contains a wealth of additional compliance information for tax exempt organizations. Be sure to review that publication carefully. It can be found at http://www.irs.gov/pub/irs-pdf/p4221pc.pdf. You can verify the tax exempt status of your, or any other 501(c)(3) organization at https://www.irs.gov/charities-non-profits/tax-exempt-organization-search or by calling 877- 829-5500 and following the prompts. Additional information about tax exempt organizations is available at https://www.irs.gov/charities-non-profits/exempt-organizations-business-master-file-extract-eo-bmf.
- IRS Information Returns. Exempt organizations must file an annual information return with the IRS – either form 990, 990-EZ, 999-PF or 990-N. Failure to file for three consecutive years results in revocation of tax-exempt status. The filing is due by the 15th day of the 5th month after the end of the organization’s fiscal year. An organization with gross annual receipts of less than $50,000 is eligible to file the 990-N or “e-post card” – a simplified online return. These forms can be found on the IRS website at https://www.irs.gov/charities-non-profits/required-filing-form-990-series. It is often wise to retain an accountant to prepare these returns.
- IRS Information Returns. Exempt organizations must file an annual information return with the IRS – either form 990, 990-EZ, 999-PF or 990-N. Failure to file for three consecutive years results in revocation of tax exempt status. The filing is due by the 15th day of the 5th month after the end of the organization’s fiscal year. An organization with gross annual receipts of less than $50,000 is eligible to file the 990-N or “e-post card” – a simplified online return. These forms can be found on the IRS website at https://www.irs.gov/charities-non-profits/required-filing-form-990-series. It is often wise retain an accountant to prepare these returns.
- Acknowledgement of Contributions. A donor cannot deduct a charitable contribution of $250 or more unless you provide written substantiation of the gift stating the cash donated, a description of property other than cash contributed, and a description and estimate of the value of any goods or services you provide in return. If a donor makes a payment of $75 or more that is partly a donation and partly a fee for goods or services (such as the cost of a meal at a fundraiser), you must provide a written statement that the deduction is limited to the amount in excess of the value of goods or services provided.
- Payroll Taxes. Your organization is subject to the same payroll taxes and withholding requirements (both federal and state) as a for-profit business, with the possible exception of federal and state unemployment tax. A payroll service or accountant should be able to assist you with these matters.
- Governance Documents. You should periodically review your organization’s certificate of incorporation and by-laws to keep them current. Does the certificate of incorporation reflect your mission? Are your by-laws consistent with actual operations? Before revising your governing documents, you should be sure to have the full support of your Board of Directors and consult with your attorney.
- Regular Meetings. You should hold regular meetings of your organization’s governing body or bodies – the Board of Directors, and the Members, if your organization is a membership organization. Keep accurate and contemporaneous minutes and maintain those records in an accessible and organized manner. Your organization must hold an annual meeting of the governing body at which officers and directors are elected, even if there are no changes in the composition of the governing body.
- Personnel and/or Board Handbook. Personnel and volunteer policies should be administered uniformly, clearly articulated in a personnel handbook, and reflect current employment law, which changes rapidly. As a starting point, your attorney may be able to provide you with a current handbook that can be adapted to meet your organization’s needs and practices.
- Insurance. Your organization should always maintain directors and officers liability coverage. Depending on your operations, general liability, auto insurance business loss and workers’ compensation insurance may also be advisable.
- Guidestar. The 990’s will eventually be posted on Guidestar at www.guidestar.org. Guidestar is a primary source of information regarding nonprofit organizations and is used by many donors to assess nonprofit organizations. So, your organization should be sure to manage its Guidestar identity and rating by updating its Guidestar profile at www.guidestar.org/ManageNonprofitReports.aspx. 990’s are also posted by ProPublica at https://projects.propublica.org/nonprofits. Many other websites also rate and provide data on nonprofit organizations, and the tech savvy nonprofit organization can take advantage of many tools, benefits, and services.
StangerLaw LLC is ready to assist you with many of the tasks described in this checklist. Contact us if you need help.