Nonprofit Accounting: Forms 501C3, Form 990, 403B

“The people who are crazy enough to think they can change the world are the ones who do.”— Rob Siltanen.

Without nonprofit organizations (NPOs) vulnerable people and communities would remain disenfranchised, with their social, cultural, and environmental needs unmet. Luckily, there are NPOs that provide these support services.

The thing is, they also need support and that’s where financial management through nonprofit accounting can make a difference.

Here are three key forms that ensure nonprofits’ compliance with accounting regulations.

Nonprofit Accounting: Form 501(c)(3)

What is Form 501(c)(3)

Form 501(c)(3) of the Internal Revenue Code is essential for NPOs to qualify for tax-exempt status. NPOs must meet the criteria specified by the IRS, including exclusive operations for charitable, religious, and educational purposes.

Net earnings remain in the organization’s purview and aren’t distributed to shareholders or private individuals.

Filing Form 501(c)(3)

The form requires detailed information about activities, governance structure, and financial operations. Potential additional documentation includes articles of incorporation, bylaws, and financial statements.

If the IRS approves the application for tax exemption, NPOs receive a determination letter confirming their status.

Significance of Form 501(c)(3)

Tax exemption is just as important to donors as it is to the organization. This is because donors’ contributions (one-time or regular contributors) are tax deductible.

Tax benefits for donors encourage private individuals and businesses to provide much-needed financial support so that NPOs can continue their good work.

Important Facts About Form 501(c)(3)

Public Support Test

NPOs must “pass” a public support test. This demonstrates that most of their financial support comes from the general public, as opposed to a limited number of donors.

Private Foundation vs. Public Charity

The source of financial support is important because it affects NPOs’ classification under section 501(c)(3). Organizations can be classified as private foundations or public charities. The types of activities also come into play when classifying NPOs.

Annual Reporting

Tax exemption requires NPOs to file an annual information return with the IRS. The exact form depends on the organization’s size. Small NPOs file Form 990-N (e-Postcard). Large NPOs file either Form 990 or Form 990-EZ.

Nonprofit Accounting: Form 990

What is Form 990

Form 990 applies to large NPOs seeking tax-exempt status. The Return of Organization Exempt from Income Tax is filed annually to inform the IRS of its mission, programs, and finances. Its innate transparency keeps donors, stakeholders, and the public in the know as far as the NPO’s financial health and practices go.

Filing Form 990

Transparency comes into play again when it informs interested parties of its governance, revenue, expenses, assets, and activities, as well as full disclosure regarding executive compensation, related-party transactions, and compliance with IRS regulations.

The form assures stakeholders that NPOs remain accountable for their actions.

Significance of Form 990

Sometimes the IRS requires support documentation to confirm NPOs’ tax-exempt status. For example, additional schedules and attachments that contain the deeper information the IRS wants.

Form 990 is essential. NPOs that don’t file the form or file an incomplete or inaccurate form face serious penalties, including the loss of their tax-exempt status.

Important Facts About Form 990

Types of Form 990

NPOs must submit accurate financial information because the value of assets and annual gross receipts determine whether they must file Form 990-EZ or Form 990-N (e-Postcard).

Public Disclosure

Transparency is paramount because Form 990 can be evaluated by the general public. The Court of Public Opinion can be brutal if people suspect the NPO didn’t abide by the regulations.

Filing Deadlines

NPOs must keep track of their filing dates because they vary according to their fiscal year. They must file by the 15th day of the fifth month after their fiscal year ends.

Penalties for Non-Compliance

Penalties for failing to file Form 990 or filing after the deadline has passed are based on the NPO’s gross receipts and delinquency period.

For more information on Form 990 from the IRS, click here.

Nonprofit Accounting: Form 403(b)

What is Form 403(b)

Form 403(b) (Tax-Sheltered Annuity Plan) is an important one for NPO employees. It’s a retirement savings plan that invests employee contributions on a tax-deferred basis. Some public education institutions can also file Form 403(b) for their employees.

Filing Form 403(b)

Form 403(b) comes with strict IRS regulations regarding contribution limits, eligibility requirements, and distribution rules. For instance, NPOs are responsible for the retirement plan, from regulatory compliance to keeping employees updated about their retirement benefits.

Significance of Form 403(b)

Form 403(b) assures NPO employees that their financial future is taken care of. Knowing they have financial security is a key motivating factor in staff loyalty. Furthermore, retirement benefits attract new talent, which contributes to the NPO’s success.

Important Facts On Form 403(b)

Form 5500

Form 403(b) isn’t the only retirement-related form for NPOs. NPOs must file Form 5500 to inform the IRS of any retirement plans. Only some 403(b)s are exempt from filing Form 5500 provided they meet the criteria. e.g., fewer than 100 participants.

Employee Responsibilities

NPOs are responsible for the plan, but employees are responsible for account management, from decisions about contributions to distributions within the NPO’s framework.

Tax Treatment

Contributions to 403(b) plans are excluded from employees’ taxable income in the year they were made. Withdrawals, however, are taxable.