Many Nonprofits Missed Filing Deadline

For charities and not-for-profits, filing their IRS Form 990 is essential to maintaining their tax-exempt status, but many need additional help and time to file. Most have a calendar year-end for their finances, meaning their tax deadline is May 15.

According to Partner Jim Daniels, a big factor in the timeliness of the filing is the amount of information that gets reported. "We do a wide variety of tax returns — from colleges and universities, to associations and also other charities — and May 15 is the first deadline to file the not-for-profit tax return. The majority of not-for-profits go on extension, because in terms of filing your tax return, there's a lot of information these days,” he said. “Because it's a public document, it's the face of the organization and a lot of people who might do research about a not-for-profit are able to access the 990, which has everything from financial information on it to disclosure in terms of compensation, any board dealings, any donor information, any international transactions.”

"The 990 is really a document that is a snapshot of how the organization exists," he added. "It goes on extension generally because I think organizations are careful to fill out the 990. They want to make a proper representation of their organization. There's a lot of governance questions on the 990 in terms of how the organization operates as well as compensation disclosure of its directors and officers. A lot of that is usually scrutinized in terms of putting that on the form, and so extensions are filed because it takes additional time to accurately complete the form."

UHY’s 2024 Not-for-Profit Trends Report found only 36% of organizations have seen an increase in funding over last year, while 24% have said that they have seen funding decrease. "The Nonprofit Trends report talks about funding levels and organizations dealing with turnover, and donor engagement," said Daniels. "It's really a lot of the common-sense things in the nonprofit world, that they're feeling the effect of what's going on in the economy today, and what's going on in terms of keeping pace with technology and keeping pace with AI, looking at some other ways to just stay current." Technology is one way nonprofits are looking to boost their operational performance, with mobile payments/crowdfunding tools, compliance and regulatory technology, and cybersecurity tools at the forefront for adoption.

Smaller nonprofits can now electronically file their 990-N or 990-EZ forms, a relatively new process. "It depends on what your gross receipts are," said Daniels. "If your gross receipts are actually less than $50,000, all you have to do is send in a postcard. It's called the 990-N. And I think if your gross receipts are under $250,000, you can file a Form 990-EZ, and it's just a lot lesser disclosure requirement for a 990-EZ rather than a 990. But they're all along the same theme, that you have to have you created an entity that is not-for-profit under the not-for-profit law. Each not-for-profit entity has to file an application for tax exemption with the IRS. Once that's accepted, then they file the Form 990."

Some organizations classified as 501(c)4s have a streamlined way to apply for tax-exempt status and self-certify; however, most not-for-profits do not qualify. It comes down to the amount of disclosure requirements necessary, said Daniels. For newer organizations, there's a streamlined tax-exempt application, the 1023-EZ or 1024. “It's a shorter form, but still, you basically have to legally set up an entity, whether it's a corporation or a trust, in order to operate as a not-for-profit," he said.

Regardless, tax-exempt organizations should be wary of the rules on adhering to their mission. "If it's a 501(c)3, it has to be educational, charitable, scientific or another mission," said Daniels. "You've got to watch out regarding lobbying rules and making political contributions. There are prohibitions against that sort of thing. The questions in the 990 are geared toward maintaining your mission, because they question the governance, the public support and where you get your funding from. Those are the kinds of things that are monitored."

Also being closely monitored is the filing of the 990, and failure to do so brings harsh penalties from the IRS. "If you miss a due date to file the 990, or don't file an extension or file late, the penalties are pretty harsh," said Daniels. "It can be up to $50 a day, $100 a day. And the IRS is very quick to notice that a return hasn't been filed timely. A lot of times we deal with clients who have received notices in terms of filing their forms." If a not-for-profit fails to file for three years, tax-exempt status can be revoked; but there are ways to be reinstated, Daniels said. This can be especially important for public 501(c)3's that receive charitable donations.

Other funds, such as donor-advised funds have grown in popularity among the wealthy, leading to a hearing by the IRS on the proposed regulations for taxable distributions from donor-advised funds. "A donor-advised fund makes it easy because the compliance is taken care of, so you can personally put money in a donor-advised fund and then they take care of all the paperwork, and the money can sit in the fund," said Daniels. "You can prefund it and not distribute it all in the same year. And that's kind of the same theory with private foundations."

“The difference between a private foundation and a public charity is that you really have only one source of contribution to that foundation, so people might set up family foundations, and they're supposed to distribute 5% of the assets on an annual basis,” he explained. “And private foundations also pay a tax on net investment income of a little over 1%. Those are monitored. As the assets grow, you're supposed to give away at least 5% of the assets every year to a charity."

For smaller donors, there are additional considerations relating to the Tax Cuts and Jobs Act of 2017, which caused fewer taxpayers to itemize their deductions and claim the charitable deduction. "If they won't exceed the itemized deduction limitation, there might be a hesitancy in terms of giving money away,” Daniels said. “Now, the flip side of that is, depending where you live, you can still get a benefit on your state taxes. Whereas if you don't itemize, federally, you might get a benefit on your state taxes for that gift. But it would be at a lower value because generally state tax rates are lower than the federal tax rates." He explained taxpayers who tend to give away more are less hesitant to make those contributions because they usually exceed the itemized deduction limitation anyway.

With several provisions of the Act set to expire in 2025, the charitable deduction and estate tax may apply to more people. "It depends on who's in power in the legislature or the presidency, and what's going to get done," Daniels explained. "It's difficult to project. Right now, everyone's worrying about the estate tax exemption dropping off at the end of 2025, from $12 million to some lesser amount. That'll be the big buzz. But I can tell you in my lifetime, the estate tax exemption has never gone backward."

Regardless of what happens, nonprofits have to be aware of the applicable rules. "I think not-for-profits still have to be cognizant of being compliant," said Daniels. "We haven't seen as many examinations by the IRS in terms of looking at not-for-profits, at least in our upstate New York area. A lot of the questions come through tax notices, either compliance penalties with late filing or regarding 1099 filings. But we still try to ensure that everybody is complying and giving full disclosure on their 990s."

Read the full interview published by Accounting Today.