Welcome to the Tax-Exempt, Nonprofit Leaders Club, or The TEN-LC, as we like to call ourselves. We pride ourselves in preparing and filing our own legal documents personally for our tax-exempt organizations. Nothing wrong with saving a little money here and there, right? Based on your application and lengthy references from your peers, you stand as a prime candidate for initiation.
But… before we begin, we have to lay some ground rules down. After accepting these rules, you can’t say you didn’t know; after all, there is a reputation to uphold here. There are several mistakes we see rookies make each year; these rules are based from the most common “oops” we’ve seen. Following these rules are expected, you break them… consequences are dire. *wink*
Rule #1: Satisfy the IRS tax provisions along with the State.
Wannabes would just file using the state’s form without including an attachment with the appropriate tax provisions that the IRS requires tax-exempt organizations to have. That’s a no-no. That’s a BIG TEN-LC No-No! And you’ll most likely end up with a taxable organization doing something like that.
What’s worse is once you receive your determination letter from the IRS, it’ll only be retroactive to the date of your corrected return and not your original incorporation date.
Rule #2: Think twice about forming a Limited Liability Company (LLC).
Generally, an LLC with individuals or other private interests as members cannot qualify for tax-exempt status. The only way an LLC could qualify for tax exemption is if its members are exempt entities. The reason being that membership interest reflects ownership interest and the IRS won’t view an organization with private owners operating for exclusive tax-exempt purposes.
Rule #3: Create customized bylaws for your tax-exempt organization.
Too many times have rookies used bylaws obviously meant for a different type of organization or written to follow another state’s rules… Don’t go there, even if you were given GPS navigation, don’t…go…there.
In a similar fashion, documents requiring compliance with open meeting law, third party approvals, or contain complicated voting member plans further proves that customized bylaws are needed for organizations.
Rule #4: Classify employees correctly.
As one of the most biggest screw-ups of new and existing tax-exempt organization, a misclassification of employees can lead to penalties, back taxes, or, worse case scenario, legal prosecution. For example, an organization hired a worker as an independent contractor and, as such, the organization didn’t buy worker’s compensation insurance. The worker got into a work related injury and the organization was sued to cover the medical bills.
Rule #5: Respect rule number six.
And that is…
Rule #6: File the appropriate Form 990 for your tax-exempt organization.
Beginners don’t realize that to receive tax-exempt status, they should act like a tax-exempt organization from the day of incorporation. That means filing a Form 990 even if you’re a start-up, even if you had a short tax year, even if you brought in no revenue at all. Forms break down like this:
- Form 990 (Long Form) – For tax-exempt organizations with gross receipts greater than or equal to $200,000 and total assets greater than or equal to $500,000.
- Form 990-EZ – For tax-exempt organizations with gross receipts less than $200,000 and total assets less than $500,000.
- Form 990-N (e-Postcard) – For tax-exempt organizations with gross receipts less than $50,000.
These returns are due on 15th day of the 5th month after your tax end date and, if you fail to file for three consecutive years, you’ll automatically lose your tax-exempt status.
Rise within our ranks by e-filing your Form 990 with Express990. We support all three 990 forms and offer expert help with live professionals from our Rock Hill, South Carolina office. For any assistance with e-filing our available 990 forms, you can contact us by phone (704-839-2321, Monday through Friday from 9am to 6pm, Eastern Standard Time), by email (email@example.com), or by live chat (www.expresstaxexempt.com).
Disclaimer: The Tax-Exempt, Nonprofit Leaders Club (TEN-LC) is a purely fictional entity created specifically to serve within this fictional novelization of real examples of tax-exempt organizations. No consequences will ensue solely from the TEN-LC by following or disregarding its suggestions.