4 Essentials of Nonprofit State Fundraising Tax Compliance
Earning and maintaining 501(c)(3) tax-exempt status opens your nonprofit up to various benefits that make funding your cause easier. Completing this process can be a daunting task, requiring your staff to invest time and resources into assembling the necessary documents and await a response from the IRS.
It’s normal to have questions about nonprofit tax exemptions and other legal requirements your nonprofit will have to be aware of to maintain its status and collect donations. However, a baseline understanding of how to navigate the essential legal channels is necessary for maintaining compliance and continuing operations.
Fortunately, your nonprofit is not alone. To help your staff gain a complete understanding of nonprofit tax exemptions and operational requirements, this article will explore four tax and fundraising essentials all nonprofits should be aware of, including:
- State Tax Exemption
- Annual Tax Returns
- Charitable Solicitation Registration
- Corporate Registration Requirements
These essentials will focus on considerations that need to be made at the state level. Once your nonprofit receives its 501(c)(3) status from the federal government, you aren’t quite done and will need to take your state’s nonprofit operation requirements into account to begin operating. Let’s get started.
4 Essentials of Nonprofit Tax Exemption in the United States
1. State Tax Exemption
While you may have already been granted tax- exempt status at the federal level, attaining and maintaining tax exemption at the state level varies depending on the state(s) you are operating in. Different states have different exemption policies and requirements for both state income tax and state sales tax.
For state income tax, most states will automatically give your nonprofit an exemption if you are also exempt at the federal level. However, some states do require nonprofits to file their income tax exemptions separately and renew them on a routine basis, so be sure to research your state’s filing requirements.
By contrast, your nonprofit is typically not exempt from state sales tax even if you are a registered 501(c)(3). In most states, nonprofits are treated like any other organization and must pay sales tax on purchases and charge sales tax on items sold. Of course, there are exceptions as some states allow nonprofits to apply for an exemption that permits them to purchase goods for their organization without paying sales tax.
The varying laws and guidelines can become quite complex, especially for nonprofits operating in multiple states. However, these regulations are necessary for nonprofits to operate ethically and transparently, increasing supporters’ trust in charitable organizations.
2. Annual Tax Returns
Each year, you will need to file Form 990 with the IRS for your nonprofit to maintain its tax-exempt status at the federal level. In most states, you will also need to file Form 990 with the relevant office of the states your nonprofit operates in as part of renewing your charitable solicitation registration (more on this below).
Some states have additional financial reporting requirements for filing your nonprofit’s tax returns. Here are three of the most common elements nonprofits will need to review or audit and submit to their state’s office:
Statement of Financial Position
You may be familiar with for-profit businesses’ balance sheets. A Statement of Financial Position is essentially the same document but with one key difference. While for-profits subtract their liabilities from their assets to determine their equity, nonprofits subtract their liabilities from their assets to determine their net assets.
Statement of Activities
Your Statement of Activities (also known as an income statement for for-profit organizations) provides an overview of your net assets over a specific period. This document compares your revenue and expenses over time, demonstrating what activities your nonprofit is spending donations on.
While you may need to make some special considerations to file your Form 990 and other financial documents, you can set yourself up for success by keeping an organized operating budget and record of financial transactions. Check in with your nonprofit’s bookkeeper and accountant periodically to ensure your finances are up-to-date and organized to prevent any last-minute scrambling to meet your deadline.
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3. Charitable Solicitation Registration
Being registered as a tax-exempt nonprofit in a state and being registered to solicit donations in a state are two different things. As Labyrinth’s guide to charitable solicitation registration explains, over forty states require nonprofits to register to solicit donations before they can begin legally fundraising from their residents.
Nearly every state has unique charitable solicitation registration requirements. However, the general application process can be broken down into three steps:
Assemble necessary documents
While each state has its own charitable solicitation registration process, many of them require the same documents, such as proof of your nonprofit’s tax-exempt status, a list of your staff and board members, and copies of any contracts you have with third-party fundraising services.
Submit application and renew as needed
Once you have completed your application, double-check one last time that you have met all of your state’s requirements. Then, submit your application and await approval. If you are approved, congratulate yourself for a job well done and mark your calendar for when you will need to renew your registration to continue collecting donations uninterrupted.
You must apply for charitable solicitation registration in each state you solicit donations in. Certain fundraising practices, such as online fundraising, can complicate this, so don’t hesitate to reach out to nonprofit legal consultants for advice and clarification about specific jurisdictions’ requirements.
4. Corporate Registration Requirements
For many states, registering to solicit donations and registering to conduct business operations are also two different processes. To continue operating in the state your nonprofit is registered in, you must file an initial corporate report and renew it as dictated by your state. For most states, this report must be renewed annually or biannually, though some states have longer timeframes, so be sure to check your state’s specific requirements.
Fortunately for nonprofits that operate in multiple states, your organization will only need to renew your corporate state registration in the state your nonprofit is incorporated in and any states where you have paid staff members (as well as North Dakota and the District of Columbia).
When it’s time to renew your corporate filings, first check whether you need to submit your documents to your state’s Attorney General or Secretary of State Office. Then, make sure to update the following two elements if needed:
Your nonprofit’s registered agents are the people your organization has designated to receive important legal and tax documents from the state. Your agents must reside in the state you are conducting business in. If your nonprofit operates across state lines and doesn’t have employees living in each state you operate in, you can employ a commercial registered agent to receive documents and act as your nonprofit’s representative.
Similar to fundraising registrations, complying with corporate state filing requirements is necessary for successfully operating your nonprofit. Nonprofits that fail to comply with these measures risk much more than just losing their tax-exempt status—they can risk being dissolved as a legal entity altogether.
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For nonprofit professionals without a background in law or accounting, even the base essentials might seem overwhelming. Fortunately, there are many basic steps you can take to make complying with state tax exemption regulations easier. Keep your nonprofit’s legal and financial documents as organized as possible, research your states’ guidelines and be conscious of any updates, and reach out to nonprofit legal consultants for help as needed.
About the author:
Dr. Stephen Urich, CEO of Labyrinth
Dr. Stephen Urich is the CEO of Labyrinth, Inc., an organization that assists charitable organizations with all aspects of charity state registration and compliance. He is also a Certified Public Accountant and specializes in nonprofit accounting. He has been working in the nonprofit sector for 25 years.