Compliance requirements for new nonprofit organizations

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Compliance requirements for new nonprofit organizations

Overview: Learn what is required to be a compliant nonprofit organization early on.

Like all businesses, starting a nonprofit organization means that you have to follow compliance standards in order to continue operating as a business.

Regardless of whether the entity is a charity, business league, labor organization, social welfare organization, or any other of the various 501c entity types, the entity will have several compliance requirements to maintain operation as a business.

After starting a non-profit it can be easy to forget about the compliance responsibilities of the organization. But we’ve outlined the major compliance requirements below as a guide:

  • Secretary of State Filings

  • Federal Tax Filings

  • State Tax Filings

  • Audit/Review/Compilation

You could get stressed at the thought of being compliant, but if you follow these guidelines, you can avoid getting yourself stuck in an NPO ditch.

Secretary of State Filings

  • All states have either an annual, biannual, or triannual reporting requirement that varies by state

  • Failure to remain current with your SOS filing results in the state suspending your business. This makes it incredibly difficult to maintain daily operations and acquire funding from lenders or donors/grantors

Federal Tax Filings

  • All non-profits must complete an annual tax return on form 990-N, 990-EZ, 990, or 990-PF

  • Failure to file your return for 3 consecutive years will result in automatic revocation of your tax-exempt status

    • Reinstatement is possible through 1 of 4 methods; however, the entity does not get to choose what method to use

    • The entity must qualify for at least 1 of the 4 methods

    • The entity will be required to file a for-profit business return for all years in which it does not have tax-exempt status and pay income tax

    • The entity must qualify for and complete 1 of the 3 retroactive reinstatement procedures to avoid any income tax liability

State Tax Filings

  • Not all states require a state specific tax form to report the activity of the non-profit

    • The states that do not require a state specific form typically require a copy of the 990 be presented to the Secretary of State with an annual report

  • Some states require supplemental filings on top of the state specific tax form

    • I.E. California requires some 501(c)3s to require a filing with the Department of Justice

Audit/Review/Compilation

  • Federal grants require the entity to undergo a financial audit when the received federal funds exceeds predetermined thresholds, typically $750,000

  • Some states will require an organization to have an audit done when above certain thresholds. For example, the California Nonprofit Integrity Act of 2004 requires California nonprofits with over $2,000,000 of gross revenue to have an audit performed

  • A state may also impose other standards on an organization when above certain thresholds. Maintaining an audit committee and having executive compensation review and approved are a few examples

  • Grantors may require a set of audited, reviewed, or complied financials to provide approval.

Do you have a knowledgeable tax preparer?

It’s important to partner with a knowledgeable tax preparer when learning about nonprofit compliance standards because they’ll be will be able to assist you with a) secretary of state filings b) federal tax filings c) state tax filings and d) audit/review/compilation.

At Smith Marion & Co., our accounting experts are knowledgeable about nonprofits and understand the struggles that not-for-profits face. We are ready and excited to partner with you today!

For a free consultation, be sure to contact our office at 909-307-2323 or  email us at info@smco.cpa.

Carlos Carazo, EA

Supervisor

Smith Marion & Co.

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