Nonprofit Finances: 3 Reasons Your Tax Returns Matter

Mathew Tooker • Jun 17, 2021

As a nonprofit professional, you’re likely passionate about the mission you're serving. You may care a lot about finances and accounting, too, but you also might not. It might even bore you.


But boring or not, your nonprofit’s finances are critical for multiple reasons. Whether you're getting your nonprofit ready for the
upcoming tax season or you're looking to get your financial statements in shape for a new fiscal year, you need to have the knowledge and the resources to manage your nonprofit’s finances well. 


Poor financial management can lead to individual supporters and grantmakers not trusting you with their hard-earned money, making it difficult to fund your mission.
To avoid these problems and many more, consider looking to a nonprofit finance expert for guidance.


At File 990, we work with small and mid-sized nonprofits to simplify their accounting and tax practices by providing a streamlined solution for the 990N and the
990 EZ. A nonprofit’s annual tax forms matter, and we’ve put together this quick guide to explain why.


In case you were unsure, your nonprofit tax returns (also known as IRS Form 990) are critical because of the role they play in your organization, ensuring your nonprofit:


  1. Avoids substantial fines.
  2. Retains your 501(c)(3) status.
  3. Prioritizes transparency with donors.


This way, you can make your nonprofit appear professional while protecting your organization from late penalties and other financial burdens. Are you ready to discover the importance of your tax forms and what that means for your nonprofit? Let’s get started.


1. Avoid substantial fines.


One of the most straightforward reasons to file your annual tax returns is to avoid the negative consequences of not filing—namely, significant fines from the IRS. After all, you don’t want to cancel out your hard-earned fundraising revenue with unnecessary fines.


This
File 990 guide shares how to determine your organization’s tax deadline (the 15th day of the 5th month after the end of your fiscal year) and the financial consequences for failing to file. If your organization has not filed your Form 990 by the required date, you may have to pay:


  • Up to $100 in fees each day that your return is late.
  • Fines totaling up to $50,000 or 5% of your gross receipts.


Avoid these consequences by making sure your nonprofit has submitted your tax return prior to your deadline.
For organizations following the calendar year, this will be May 15th each year. 


Be sure to complete your returns completely and accurately, starting with
choosing the right version of the Form 990. An incomplete or otherwise inaccurate tax form will not count as submitting your return on time and can result in the same penalties as failing to file.


Luckily, you can avoid these fines by filing for an extension on your annual tax forms. If you notice your organization’s deadline is quickly approaching and you still haven’t completed your return (or are experiencing a delay), you might want to consider filing Form 8868 for a six month extension.


2. Retain your 501(c)(3) status.


Filing your organization's annual tax returns also allows you to retain your official status as a registered 501(c)(3) nonprofit. To receive this designation, a nonprofit must submit Form 1023 to the IRS. Then, to retain the status, you’ll need to file your Form 990. 


If you fail to file your annual 990, you might put your organization at risk for losing the benefits associated with being a registered nonprofit. For example,
your official status as a 501(c)(3) nonprofit is critical for ensuring:


  • Tax-exemption: One of the biggest benefits of operating as a registered nonprofit is the tax-exemption. Registered 501(c)(3) organizations are exempt from federal taxes as well as many sales, property, and state income taxes, which allows them to retain as much of their hard-earned funding as possible. Without this official designation, your organization will be responsible for the typical taxes expected from for-profit institutions.


  • Tax-deductible donations: Being able to claim charitable donations as tax deductions is a huge perk for philanthropic taxpayers. While it’s possible to fundraise and operate as a charitable organization without being registered as a 501(c)(3) nonprofit, it’s significantly easier to do so with that designation in hand. This way, donors will trust the authority of your organization, and they can even claim their donations on their annual tax filings!


  • Grant eligibility: Maintaining 501(c)(3) status also allows you to stay eligible for certain grants. Grant funding—whether from corporations, government agencies, or private grantmaking foundations—can supplement contributions from individual donors. Grant-giving institutions want to provide substantial amounts of funding to charitable organizations, but they also want to ensure their resources are going to reputable causes.


In addition to the substantial fines outlined in the previous section,
failing to file for three consecutive years can cause an organization to lose its status as a 501(c)(3) nonprofit. That means losing the benefits that come along with it, too!


If you lose your nonprofit status, not only will you have to go through the extensive and time-consuming process of re-filing, you’ll also have to pay the associated fees
again. Therefore, it’s substantially easier to just retain your status by filing your Form 990 every year.


3. Prioritizes transparency with donors.


Fundraising professionals know that the secret to attracting donors is transparency, and this need has increased with the next generations of donors. Since so many nonprofits are funded (wholly or in part) by donor contributions, fostering relationships with these individuals by ensuring transparency is critical.


But how can you be transparent about your finances?
Qgiv’s guide to donor stewardship explains that a big part of maintaining recurring donors is effectively communicating impact. While this is often done on a personal level for each donor, you can also show your supporters that their contributions are being used responsibly by accurately filing your annual tax forms.


After all, that’s why nonprofits’ tax returns are made available to the public each year. When donors and prospective supporters research the organizations they currently or are considering supporting, they feel more confident in the impact their donations will have when given to a reputable organization.



All in all, a nonprofit’s finances play a crucial role in ensuring their overall health and success. By completing your annual tax return, you’re one step closer to avoiding significant fines, retaining your status as a registered nonprofit, and maintaining high levels of transparency with funders.


Best of all? Filing your taxes doesn’t have to be difficult! When you
invest in the right Form 990 software, you can save on an accountant and set your organization up for continued financial success. Good luck!


About the Author

Mathew Tooker


Mathew's expertise is in sales forecasting, goal setting, client growth initiatives and business development and analytics. When he is not laser focused on moving organizations forward, you can find him spending time with his wife, Lauren, and two dogs, Reagan and Teddy, running marathons and watching the Atlanta Braves and Auburn sports.


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