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 Stanger Stanfield Law for more information.
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 Labor – Unemployment Compensation. You may be contacted by the Connecticut Department of Labor regarding filing an application for a Connecticut unemployment registration number. You must submit such an application, and become subject to Connecticut unemployment compensation law, if you have employees. An application is available at https://www.ctdol.state.ct.us/uitax/RegisterReq.htm.
- Department of Revenue Services – Reg-1 and 990T. You may also be contacted by the Connecticut Department of Revenue Services (“DRS”) regarding Reg-1- Business Taxes Registration Application. The Reg-1 can be completed in a way that indicates that your organization is a non-stock, tax exempt organization and is not subject to these taxes (unless you have employees in Connecticut and must withhold income tax. It can be found online at https://portal.ct.gov/drs. If an organization receives unrelated business income, it must also file a Form CT-990T with DRS.
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 (or claim an exemption), qualify to do business, file for exemption from state taxes, maintain an agent for service of process, and comply with regulations regarding payroll taxes and unemployment compensation in those states. Consult counsel to discuss these issues if you plan to operate in other states, in addition to Connecticut.
- EIN and IRS Determination Letter. Please keep the “determination letter” that you received from the IRS in a safe place, as it is evidence of your organization’s tax exempt status. Many institutions with whom you do business or from whom you solicit donations will ask for this document. In the process of applying for tax exempt status we obtained an Employer Identification Number (“EIN”) for your organization. The EIN is like a social security number for your entity. Share the EIN only in limited, appropriate circumstances (for example to open a bank account). It is the only number that you will receive from the IRS. There is no such thing as a tax exempt number. Depending on your situation, you may receive a number from the State of Connecticut or other state.
- Tax Exempt Status. IRS Publication 4221-PC, and the IRS website, https://www.irs.gov/charities-and-nonprofits contain a wealth of additional compliance information for tax exempt organizations. Be sure to review IRS publications carefully. Pub 4221-PC can be found at https://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. 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 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. Your organization likely adopted a Code of Ethics provided by our office that contains mandated conflict of interest, whistleblower protection and records retention policies. Conform your practice to these policies and consult counsel if a question arises. If your organization adopted the Code of Ethics we provided, it contains a conflict of interest disclosure form to be completed annually by all directors, officers and senior level employees. The by-laws and Code of Ethics are a living documents. They belong at your figure tips, and not in the back of a drawer.
- Personnel and/or Board Handbook. Personnel and volunteer policies should be administered uniformly, clearly articulated in a handbook, and reflect current employment law, which changes rapidly. If you have employees, your attorney may be able to provide you with a current handbook that can be adapted to meet your organization’s needs and practices.
- 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.
- The organization’s 990’s will eventually be posted on Guidestar at https://www.guidestar.org/. Guidestar is the primary source of information regarding nonprofit organizations. Take the time to check and manage your Guidestar profile.