Are You Risking Your 501(c)(3) Status?

Maintaining your 501(c)(3) status is crucial for nonprofit organizations, not just for tax-exempt benefits but also to maintain the trust and support of your donors. Here we will explore the key practices and compliance strategies to ensure your nonprofit does not risk its valuable status.

Understanding the Importance of 501(c)(3) Compliance

The 501(c)(3) status grants nonprofits exemption from federal income tax and allows their donors to write off donations from their taxes. However, this status comes with stringent compliance obligations which, if not properly managed, can lead to serious consequences including the revocation of tax-exempt status.

Adhere to Charitable Purpose

Your organization must continuously operate in alignment with its charitable purpose as defined in its articles of incorporation. Deviation from these stated purposes can attract scrutiny from the IRS.

Accurate and Timely Filing of Form 990

All 501(c)(3) organizations are required to file Form 990 annually. This form discloses your nonprofit’s finances, activities, and governance to the IRS and the public. Late filings or inaccuracies can lead to penalties or even loss of tax-exempt status.

Avoiding Unrelated Business Income (UBI)

Earning too much unrelated business income (UBI) can jeopardize your 501(c)(3) status. If certain activities generate a substantial amount of income that is unrelated to your primary purpose, it might not be considered tax-exempt by the IRS.

Non-participation in Political Campaigns

501(c)(3) organizations are strictly prohibited from engaging in political campaigns either in support of or opposition to political candidates. Violating this prohibition can result in the revocation of tax-exempt status. Review this blog post for more details.

Practical Steps to Secure Your 501(c)(3) Status

• Ensuring compliance involves several practical steps that can safeguard your status:
• Regular Compliance Checks: Conduct annual reviews of your activities and finances to ensure they align with IRS requirements.
• Educate Your Team: Make sure that all your staff and board members understand the limits and legal obligations of a 501(c)(3) organization.
• Maintain Good Records: Keep detailed records of all financial transactions, board meeting minutes, and decisions related to the organization’s management.

Leveraging Legal Expertise

Consulting with a lawyer specializing in nonprofit law can provide an additional layer of security. They can help you navigate complex legal waters, especially when implementing new programs or revenue streams.

Common Pitfalls and How to Avoid Them

Many nonprofits inadvertently put their 501(c)(3) status at risk by:

• Failing to Update Records: Always update your organizational documents and IRS records whenever there are changes in your management, operational structure, or mission.
• Engaging in Excessive Lobbying: While some lobbying is permissible, it should not represent a substantial part of your activities.

Securing your 501(c)(3) status is not just about adhering to regulations—it’s about ensuring the long-term sustainability and integrity of your organization. By understanding and implementing these guidelines, you can continue to operate confidently, maintaining the trust of your donors and the public.

Review your nonprofit’s activities and practices today. Are you fully compliant? Don’t wait until it’s too late. Consider a consultation with a nonprofit specialist to ensure your organization remains in good standing and true to its mission.