As we wrap up 2019, your nonprofit is likely kicking your fundraising strategy into high gear. After all, there are so many year-end activities that can help boost your fundraising campaigns, like Giving Tuesday and holiday giving.
However, there’s one thing you’re probably not thinking about just yet: tax forms.
As we enter 2020, tax season is quickly sneaking up on all of us. While 501(c)(3) organizations don’t pay taxes, that doesn’t mean you get off scot-free. You’ll still need to file your appropriate Form 990 annually.
Generally, larger organizations are used to this information and are set in their ways about completing it. However, small to mid-sized nonprofits tend to have a bit more trouble. These are the nonprofits completing the 990-N and 990EZ forms. We’re going to answer some of the common questions that nonprofits have about these forms, including:
- What are the differences between the forms?
- How do I know which form to file?
- What are the penalties for not filing the forms?
- What do the 990-N and 990EZ have in common?
- How do I file this form for my nonprofit?
Ready to learn more about your nonprofit’s needs for the upcoming tax season? Let’s dive in!
1. What Is The Difference Between 990-N and 990EZ forms?
The IRS form 990-N is for very small organizations. It’s the easiest form to complete as an eight-question form. Meanwhile, the form 990EZ is slightly longer. It’s four pages rather than eight questions.
However, this doesn’t mean the 990-N is any less important than the 990EZ!
Both forms are incredibly important for qualifying nonprofits to file. They’ll also ask for some of the same questions, including:
- Your nonprofit’s EIN
- The tax year
- Your gross receipts
- Your nonprofit’s legal name
- Contact information
**The 990EZ is just a bit more extensive than the 990-N. **You’ll need access to information such as:
- Net asset changes
- Balance sheets
- Service accomplishments
- Lists of key stakeholders and employees
- Grant information from the previous tax year
However, the primary difference between the forms is the eligibility of nonprofits to file, which we’ll cover more in the next section.
If your nonprofit is nervous about collecting all of the data for the 990EZ, File 990 offers a complete guide that you can reference. The more prepared you feel, the easier tax season will be.
2. Who files each form?
Why would you do more work while filing tax forms than absolutely necessary? Knowing the nonprofit eligibility parameters for each form can save you a lot of time filing.
If you file the 990-N when you’re supposed to file the 990EZ, you’ll need to file again. Or, if you file the 990EZ when you could’ve done a 990-N filing, you’re doing more work than is necessary.
Here’s the difference:
Nonprofits can file the 990-N if…
- Gross receipts are less than $50,000
Nonprofits can file the 990EZ if…
- Gross receipts are less than $200,000
- Gross receipts are more than $50,000
- Total assets are equivalent to less than $500,000
Just knowing which form your nonprofit should file this year is a great first step. Try to file early (far before the deadline) to allow yourself some flexibility to gather the data and documents you need to file the form you qualify for.
Prepare for your tax season by starting early and doing the right research so that you know which form your nonprofit needs.
3. What are my penalties for not filing?
You may be thinking, “Sure, I know which form to file now, but what if I forget about it?”
Our advice is: Don’t forget.
Form 990s are your nonprofit’s platform to communicate with the government that you deserve to remain tax-exempt in the future years. But they don’t like losing the potential money that taxes bring. So, it’s important to remember to remind them year after year why you’re not filing taxes.
Plus, there are some hard penalties for forgetting to file your nonprofit’s 990.
If you forget to file the 990-N…
Your nonprofit will receive a notice that you’ve failed to file your forms. While this may not seem like much, it’s not something to be ignored!
If you forget to file your 990-N for three consecutive years, your nonprofit will automatically lose its tax-exempt status. Harsh, right? No one wants to reapply for that again.
We recommend making a habit of completing your 990-N each and every year. This will help you stay on track and make sure you keep this important, money-saving status.
If you forget to file the 990EZ…
Your nonprofit will be imposed a penalty of $20 for each day you’re late. The maximum late penalty is $10,000 or 5% of your gross receipts, whichever comes first.
Imagine how much more fundraising you’ll need to do to make up for that penalty expense!
Plus, if you forget to file for three consecutive years, you’ll lose your tax-exempt status (same as with the 990-N).
So keep the deadline in mind for your tax forms! The deadline is the 15th day of the 5th month after the last month that concludes your fiscal year. If you’re on the calendar fiscal year, this means your 990 is due on May 15th.
4. What do these forms have in common?
We’ve touched a lot on the differences between these forms, but they really have a lot in common as well. The primary commonality: Any Form 990 informs overhead calculations.
The Forms 990-N or 990EZ (as well as the full form) are public knowledge. Many corporations or major donors will use these documents to calculate nonprofit overhead for different organizations.
Your nonprofit’s overhead can be calculated by combining the management and general costs recorded on your 990 with fundraising expenses also recorded.
According to Double the Donation’s annual fund guide, much of these overhead costs are spent from the annual fund and used to cover everyday expenses like facility bills, rent, marketing, and employee salaries.
When thinking about your nonprofit’s overhead, you should consider:
Some overhead expenses are required to keep your nonprofit running. More is required to help it grow.
Nonprofit donors prefer their donations to go directly to your mission rather than overhead expenses.
It’s important to strike a balance between cutting overhead to not waste money, and spending enough to grow your nonprofit.
In order to best communicate this, don’t rely entirely on your nonprofit to communicate your expenses. Your annual report communicates more specific uses for your expenses and displays the impact, an element your 990 is missing.
The annual report, when used correctly, will be a better indication of your nonprofit’s overhead expenses than your 990 because you can provide an explanation for the investment and show impact. This can help improve transparency and convert more prospects to annual donors.
5. How should my nonprofit file the form I need?
Now you know which 990 to file, why your nonprofit needs to file it, and what it’s used for by donors and prospects. But how do you actually get started filing your form?
There are three ways nonprofits like yours may file tax forms each year:
- You can file the form in-house. Generally, nonprofits with their own accounting departments will opt for this method. However, simply printing the form and filling it out is not recommended for smaller organizations without a complete accounting team.
- You can hire an accountant. Hiring an accountant is a great way to make sure your form is accurate. However, it can also make you feel detached from the overhead expenses, and the price of the accountant can add up quickly.
- You can use e-filing software. The best way for small nonprofits to file their taxes is with an e-filer. A good solution will automatically pull data from the IRS database and ask easy questions to fill out only the relevant parts of the 990 form. If you’re looking for a great solution, start here.
Using the proper tools to file your tax forms, whether that be for a 990-N or 990EZ, will help your organization save time and energy. Then, you can focus on what really matters: your mission.
As your nonprofit wraps up 2019, don’t forget to be thankful that you don’t need to pay taxes on any of the donations you’re getting from giving day campaigns and general generosity of spirit. Instead, all you need to do is fill out a little form.
Don’t leave your 990 (990n vs. 990ez) until the last minute. With the research from this article, you’ll be ready to start the year off right and put tax season behind you early on. Good luck!