IRS Form 990: Tax Preparation Guide for Nonprofits

Nonprofit organizations help improve people’s quality of life at the municipal, state, or even national levels. Consequently, this type of organization is eligible for specific tax benefits, namely that they are exempt from most federal income taxes.

However, nonprofits with the IRS’s tax-exempt status are still required to fulfill certain requirements, such as filing a yearly Form 990 or other 990 series information return. 

Understanding tax issues related to nonprofit organizations can be time-consuming and complicated for beginners. So in this article, we’ll give a detailed tax preparation guide for nonprofits by answering the most common questions, including what Form 990 is, what form a nonprofit organization needs to file, and how to file taxes for nonprofits. 

What is the IRS Form 990?

The IRS Form 990 series are informational tax forms that most nonprofit organizations must submit annually. Both the long-form and short-form provide the IRS with details about the organization’s financial situations and annual activities, including grants, fundraising fees, program service revenue, employee salaries, and the assets the organization purchased, sold, or maintained. The form also shows the number of employees, the number of voting members in the governing body, and the organization’s goal statement.

According to the IRS, all tax-exempt nonprofits must file their three most recent Form 990s. All Form 990s are available to the public, meaning anyone can access the data. Some companies use these documents to provide funders with additional information about the nonprofits they’re interested in sponsoring.

Which form does a nonprofit file?

Not all nonprofit organizations file the same Form 990. Many types of nonprofits, including religious institutions, foreign organizations, and specific governmental and political organizations, are exempt from filing the Form 990 series.

Nonprofits file the general IRS Form 990 if their organization’s gross receipts are $200,000 or more and its total assets are $500,000 or more. Form 990 is a twelve-page form typically filed by old and large nonprofits.

Tax-exempt nonprofit organizations with gross receipts of $200,000 or less and assets less than $500,000 at the end of the year are required to file Form 990-EZ. Form 990-EZ is only four pages long and is considered the short-form return. 

Tax-exempt nonprofits with gross receipts less than or equal to $50,000 may file a Form 990-N. Form 990-N is often known as the 990 Postcard. This form is the shortest of the IRS Form 990 series, with only eight questions, and must be filed electronically. This form differs from other Form 990s because it’s much shorter and easier to complete.

There’s a 4th type of Form 990 as well, which is filed annually by private organizations – Form 990-PF. You can file Form 990-PF online on the IRS website.

What is the deadline for filing nonprofit taxes?

The deadline for filing nonprofit tax returns is the 15th day of the fifth month after the end of the organization’s fiscal year. Since most nonprofits operate on the fiscal year, their tax forms are due on May 15th unless they’ve specifically requested an extension. For example, if your organization’s accounting year ends on December 31st, 2021, you must file Form 990 by May 15th, 2022.  

What happens if a nonprofit fails to file a Form 990? 

Nonprofit organizations that fail to file a Form 990 series tax form for three consecutive years can lose their tax-exempt status, which can cause long-term consequences for the organization. 

If you’re unsure how to file a Form 990, you can check our step-by-step guide below or consult a tax professional. 

The IRS Form 990 tax preparation guide for nonprofits

Nonprofit organizations must file Form 990 annually to maintain their tax-exempt status. Here’s the detailed guide to filing a Form 990:

  • Determine which form you must file according to the IRS criteria.
  • Keep all of your business information (including your business’s legal name, tax year, Employer Identification Number (EIN), gross receipts, contact information, etc.) in order. This practice is also vital to any type of tax preparation.
  • Gather information about employee salaries, fundraising activities, and other income or donations. You may also need to include your W-2s for employees, donation receipts, etc. 
  • Tax-exempt organizations are generally required to file electronically. Especially large organizations, which file at least 250 returns (such as Form W-2 and Form 1099), are required to file Form 990 electronically. 
  • Fill out the form as indicated, paying close attention to the Checklist of Required Schedules, which outlines which sections must be filled out based on your organization’s special circumstances.
  • File the form by the 15th day of the fifth month after the end of your organization’s accounting period. 

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The bottom line

Filing nonprofit taxes may seem challenging at first, but as long as you keep our IRS Form 990 tax preparation guide in hand, together with the right knowledge, resources, and tools, you can focus on starting and growing your nonprofit organization. 

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What Are Pass-Through Entities and Sole Proprietorships?

Pass-through entities and sole proprietorships are considered the dominant business structure in the US, but what do these terms really mean? How do they pay taxes to the US government? 

This blog will walk you through the pass-through structure and taxation, from the definition, types, and pros and cons of this business structure. 

What are pass-through entities and sole proprietorships?

A pass-through entity is a corporate structure in which taxation on the business income is immediately passed on to the shareholders to prevent duplicate taxation. Organization owners and shareholders under this model are taxed on the individual income earned by the company and do not have to pay extra company tax for managing the company.

Pass-through entities file more tax returns and report more business income than C corporations. Pass-through entities are not subject to corporate income tax and instead report their income on their owners’ individual tax returns.

Sole proprietorships, partnerships, limited liability companies (LLCs), and S-corporations are the most typical examples of pass-through entities. We’ll go over each of them in more detail below.

Types of pass-through entities

The most excellent part about operating a pass-through organization is that business owners have many alternatives. Here are the four different types of pass-through entities to help you better understand why you should or shouldn’t use each one.

Sole proprietorships

Sole proprietorships are the most popular type of pass-through entity, as they are the default choice for most independent contractors or freelancers. This type of business is typically easy to establish. However, sole proprietors have limited economic and accounting safeguards.

This form of pass-through entity is appropriate if you are a new business owner who is just starting up on your own. You can convert to a different model when hiring people or collaborating with other persons and groups.

Sole proprietors use Schedule C to report their business’s income or loss and determine their taxation. 

Partnerships

This type of pass-through entity is commonly used to incorporate larger micro-businesses than sole proprietorships. Partnerships are controlled by two or more people and require formal incorporation and ownership rights percentages. 

You can consider electing your business as a partnership if your company has numerous owners but isn’t large enough to be a corporation.

Limited Liability Companies (LLCs)

There are two kinds of limited liability companies (LLCs): Single-Member LLCs and Multi-Member LLCs. 

Single-Member LLCs pay their taxes in the same way as sole proprietorships, whereas Multi-Member LLCs pa in the same way as partnerships. Owners of Single-Member LLCs file their income taxes with Schedule C, Schedule E, and Schedule F, whereas associates in Multi-Member LLCs file Schedule K-1, which reflects their share of corporate profits on Form 1065.

S corporations

S corporations file their company taxes on Form 1120-S, but their revenue is immediately passed to the stakeholders and investors, who report them on Schedule E

Owners must pay “appropriate compensation,” taxed under the Federal Insurance Contributions Act but are not obligated to pay SECA tax on their profits (FICA)

Advantages and disadvantages of pass-through entities

It is advisable to investigate the benefits and drawbacks of pass-through entities to understand before electing your business as a pass-through entity.

Advantages of pass-through entities

  • Tax breaks: Pass-through entities help enterprises minimize multiple taxes by classifying net profit as individual income.
  • Simple set-up process: Several pass-through entities (including sole proprietorships and partnerships) have very few service charges and registrations, making them very simple to set up.
  • Equitable tax structure: By categorizing corporate income as personal income, owners in higher tax brackets will shoulder a more significant percentage of the tax burden.
  • Deductible losses: Owners of a pass-through organization can claim losses sustained by their firm to decrease their personal taxable income.

Disadvantages of pass-through entities

  • Stock restrictions: S-corps are the only kind of pass-through corporation that can issue stock. They are restricted to 100 investors and one form of stock, which may make raising funds from investors more challenging.
  • Fringe benefits tax: Fringe benefits (such as health insurance, stock options, and vehicles) are income for C-corps but not employees. Pass-through entities are not eligible for this benefit. However, there are limited exceptions for medical insurance. Therefore fringe benefits may be taxed.
  • Income tax on unreceived income: Even if the money stays in the bank account, shareholders of pass-through organizations must pay tax on business revenue (instead of being distributed to the owners).

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All You Need to Do for Stress-Free Corporate Tax Preparation

If you own a corporation or have formed an LLC, you’re required to file a corporate tax return every year. Understanding your business structure and determining the necessary documents can help you prepare your corporate tax return more easily and efficiently. This article will walk you through the most practical steps for stress-free corporate tax preparation. 

Determine if your business is an S Corporation or a C Corporation

If you establish a corporation, your business will be automatically classified as a C corporation for federal income tax purposes. A C-corporation is a traditional corporation that pays corporate income tax on its profits and pays tax on its shareholders’ salaries and dividends.

This taxation on both the corporate and individual sides is sometimes known as “double taxation.”

Small businesses can avoid double taxation by requesting to be classified as S-corps because S corporations don’t have to pay any corporate tax. S corporations’ profits and losses are passed through to their shareholders’ individual tax returns, and those profits are taxed at their individual income tax rates. 

To be qualified as an S-corp, a corporation must meet specific requirements, including: 

  • Having fewer than 100 shareholders
  • Having only one type of stock
  • Not having corporations, partnerships, or non-resident aliens as stockholders
  • Being a domestic corporation

Prepare essential information

The necessary information for corporate tax preparation includes the company name, address, employer’s ID number, date of incorporation, and total assets. The corporate financial officer will also need to provide detailed information about the corporation’s income, including: 

  • Gross revenue
  • Cost of goods sold
  • Dividends
  • Royalties
  • Interests
  • Rental costs
  • Capital gains

Claim tax-deductible expenses

Corporations are able to claim many tax-deductible expenses against income, including employee salaries, bonuses, the cost of employee health insurance, and retirement programs.

Understanding and making the best use of these deductions will help you maximize your tax savings. To claim these expenses, the corporation’s financial officers should track these details throughout the year and be able to provide complete documentation in the event of an audit. The most common tax-deductible expenses are the following:

  • Employees’ compensation, allowance, bonuses, and other salaries
  • Employees’ benefit packages
  • Repairs and maintenance fees
  • Rents
  • Taxes and licenses
  • Interests
  • Contributions to charity
  • Depreciation costs
  • Advertising costs
  • Pensions and profit-sharing plans
  • Domestic production activities

Submit essential forms for corporate tax preparation

Form 1040

If you formed an LLC or hired yourself as an employee of your corporation and gave yourself a salary, you must list that personal income on your Form 1040. Some corporations can be considered “pass-through” entities, which means a legal business entity that passes any income it makes straight to its owners, shareholders, or investors. The company’s members or owners must then list the income, profit, and losses on their individual income tax returns.

Form 1120

Form 1120 is the tax form that C corporations (and LLCs filing as corporations) use to file their income taxes. This form also includes Schedule C. This form requires basic information about the corporation, including your employer identification number, the date you incorporated, total income, a list of deductions, and employees’ compensation. Form 1120 also includes other schedules that may or may not apply to your business, such as Schedule A (containing the cost of goods sold,) and Schedule K (listing your corporation’s information, e.g., your business type).

Schedule C

Schedule C records deductions, dividends, and any profit or losses that your business incurred. On this form, you can also record essential expenses to run your business (e.g., the mileage to and from business meetings or business meal expenses). Schedule C is not a stand-alone document and is usually supported by your Form 1040 or Form 1120.

Form 1065

If you have income through a partnership, such as a limited liability partnership, you may need to file Form 1065. According to the IRS, partnerships do not pay taxes on their income. On the other hand, their profit and loss are passed on to the partners’ individual tax returns. 

Other tax forms

If you hire employees or independent contractors, you need to submit other necessary forms as well. For example, if you withhold Social Security and Medicare from your employees, you must send W-2s and W-3s to the Social Security Administration. You must also file Form 944 electronically for federal unemployment taxes. If you paid more than $600 for each independent contractor for their work or services, you must submit Form 1099-MISC. You may also need to issue Form 1099-MISC if you paid more than $10 in royalties or broker compensation. 

File your federal tax return

The type of federal tax return you file for your corporation depends on whether you’re an S-corp or a C-corp. 

S-corp owners need to file the following forms: 

  • Form 1120-S: This form contains your corporation’s income, expenses, and losses. 
  • Form K-1: This form lists your corporation’s shareholders and their share of the corporation’s income, deductions, and credits. You must also provide your shareholders with copies of their K-1 forms so they can report their share of the corporate income or loss on their individual income tax returns.

If your business is a C corporation, you’ll file a corporate tax return on Form 1120. The corporation’s dividends are then filed on the shareholder’s individual tax returns.

File your state tax returns

You’ll also have to file a state corporate income tax return based on your tax status and the state where your corporation was formed. The corporate tax rate is commonly a fixed percentage that varies by state. If your corporation and/or its owners are registered to run business in other states, they may also need to file other state tax returns.

Pay estimated corporate taxes

While C-corps must pay estimated corporate income tax, S-corps must make estimated tax payments for certain S corporation taxes. You need to submit these estimated tax payments on a quarterly basis throughout the year.

Corporations that fail to pay their estimated tax payments on time may face interest and underpayment penalties.

Corporate tax preparation can be confusing, so it would be a good idea to consult with a tax professional or a certified accountant. By that, you can understand the consequences of C-corps or S-corps taxation, identify the deadlines for paying different corporate taxes, maximize your business tax deductions, and file your tax return easily. 

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