Seven Ways Nonprofits Can Lose their IRS Tax Exemption
Nonprofits can lose their IRS exemption if they fail to meet certain requirements or engage in certain activities that violate the rules for tax-exempt organizations. Here are some of the ways nonprofits can lose their IRS exemption:
1. Failure to file annual Form 990Nonprofits are required to file an annual Form 990 with the IRS, which provides information about the organization's finances, governance, and activities. Failure to file for three consecutive years can result in automatic revocation of tax-exempt status.
2. Engaging in prohibited political activities
Nonprofits are prohibited from engaging in certain political activities, such as endorsing or opposing political candidates. Violating this rule can result in loss of tax-exempt status.
3. Excessive lobbying
Nonprofits are allowed to engage in some lobbying activities, but if those activities become a substantial part of the organization's overall activities or if they exceed certain limits, the organization may lose its tax-exempt status.
4. Private benefit or inurement
Nonprofits are prohibited from providing excessive private benefits to individuals, such as excessive compensation to executives or personal use of nonprofit assets. Violating this rule can result in loss of tax-exempt status.
5. Operating for a non-exempt purpose
Nonprofits must operate exclusively for charitable, educational, or other tax-exempt purposes. If an organization begins to engage in activities that are not consistent with its tax-exempt purpose, it may lose its tax-exempt status.
6. Non-compliance with state law
Nonprofits must comply with state law in addition to federal law. Failure to comply with state law, such as failing to file required state reports or registrations, can result in loss of tax-exempt status.
7. Excessive UBIT
Yes, it is possible for a tax-exempt organization to lose its tax-exempt status as a result of engaging in excessive unrelated business income activities (UBIT).
Under the tax code, tax-exempt organizations are generally not allowed to engage in activities that generate unrelated business income, which is income from a trade or business that is not substantially related to the organization's tax-exempt purposes. If an organization generates too much unrelated business income, it may lose its tax-exempt status.
Specifically, if an organization generates more than $1,000 of gross unrelated business income in a taxable year, it must file a tax return and pay taxes on that income. If the organization generates enough unrelated business income over a period of years, the IRS may determine that the organization is no longer primarily engaged in tax-exempt activities and revoke its tax-exempt status.
It's important for tax-exempt organizations to carefully track their unrelated business income activities and consult with tax professionals to ensure compliance with IRS rules and regulations.