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Common missteps can jeopardize tax-exempt status for nonprofits

On Behalf of | Dec 8, 2023 | Non-Profit Organizations

For nonprofit organizations, getting tax-exempt status is a critical part of running a functional and thriving operation. Once it has been granted, it can be easy to forget how challenging it can be to maintain that status.

Simple mistakes can place that tax-exempt status in jeopardy. Avoiding these errors is obviously the preferable choice, but when the IRS takes away the tax-exempt status, it is also important to know how to try and regain it.

Know the areas that impact tax-exempt status

For tax-exempt status, a nonprofit must be attentive regarding the rules to maintain it. Its purpose must be for an exempt activity that does not benefit anyone or anything privately. It cannot let income or assets be a boon for those who are working inside the organization. This is known as private benefit/inurement.

Politics can also lead to problems with a nonprofit. This includes lobbying and taking part in political campaigns. Lobbyists are prevalent in any industry, but nonprofits need to exercise caution before making proposals, giving support or opposing legislation. The organization is also precluded from being heavily involved in a political campaign for specific candidates.

Nonprofits that generate income from activities unconnected to its mandate could be confronted with issues related to unrelated business income. With UBI, there could be ancillary benefit that the nonprofit receives and it may be problematic with its status.

Although nonprofits do not pay federal income tax, they still must provide information to the IRS. Finally, it must operate based on its stated purpose that was detailed when it was granted tax exemption. If it deviates from that purpose, it needs to tell the IRS.

Advice on maintaining tax exemption is key

There are many layers for nonprofit organizations getting and keeping tax-exempt status. Regardless of the intention with the entity, it is essential to be fully cognizant of the rules. Often, a nonprofit make a simple error that causes long-lasting problems to sabotage their entire objective. Whether it is to avoid these mistakes or to repair them after they have occurred, it is useful to know what options are available.