Your Outside
In-House Legal Counsel

How to lose your tax-exempt status

On Behalf of | Jun 27, 2023 | Non-Profit Organizations

One of the biggest benefits you enjoy as a nonprofit organization is your tax-exempt status, which prevents you from paying federal income taxes.

Maintaining your tax-exempt status is extremely important, and luckily, it is relatively easy to do if you follow certain rules. The rules apply to 6 different areas:

  • Annual reporting
  • Lobbying
  • Political activity
  • Operate in accordance with your purpose
  • Private benefit
  • Unrelated business income

While you do not have to pay income tax to the IRS, you must still report certain information to them each year. This is your annual reporting requirement. The information generally just verifies that you still qualify for your exemption.

Lobbying and political activity

You may not lobby. Lobbying involves contacting or encouraging others to contact legislators to influence their legislative efforts through supporting or opposing proposed legislation.

Similarly, your organization cannot participate in the political campaign of anyone running for public office. This rule applies to campaigns at all levels: local, state and federal.

Your nonprofit’s stated purpose

You must continue to operate your nonprofit organization in accordance with the stated purpose you included in your application for exemption. Deviating from your organization’s primary purpose could cause you to lose your tax-exempt status.

A nonprofit organization’s services are meant to serve the public. Evidence that your nonprofit’s activities have gone to serve the private benefit of an individual or organization can also mean a loss of your tax-exempt status.

The private benefit rule applies to any substantial benefit. Therefore, if some of your activities benefit a private party, but only incrementally, you may not lose your status. It is best to check with a professional to verify before engaging in the activity.

Unrelated business income

Finally, if you earn too much income from a business or activities that are unrelated to your nonprofit organization’s purpose, you could lose your tax-exempt status. Keep careful records of any unrelated income and review it regularly to make sure it is not jeopardizing your status.