Which Nonprofits Must File a Tax Return

By August 26, 2020 Nonprofit
Which Nonprofits Must File a Tax Return

There is a common misconception in the public at large that nonprofits in Arizona and elsewhere are not required to file a tax return with the IRS. People hear “tax-exempt” and believe that means exempt from the roll-call. Not so. Even nonprofits must file a tax return—for the most part.

Though it is certainly the case that the majority of nonprofit organizations are not required to pay any federal taxes—and indeed, this is what the phrase “tax exempt” refers to—they still must file a particular form with the IRS on an annual basis: Form 990. This form enables the IRS’s evaluation of how a nonprofit functions, including information about its finances, the programs it runs, and the mission that guides it.

But churches, along with faith-based organizations such as religious schools and missionary organizations are exempt from the requirement to file a Form 990. However, where a church has Unrelated Business Income, it must file Form 990 so as to pay its Unrelated Business Income Tax (UBIT)—which kicks in when the income-generating activity is a trade or business, is carried on by the church on a regular basis, and is not “substantially related” to its exempt religious purposes. The only situations in which business activities meet these three criteria but might still be exempt from UBIT are where the work done to operate the business is “substantially all” performed by volunteers; where the activities are engaged in mainly for the convenience of the organization’s members; or where the subject matter/products being sold are “substantially all” obtained via donation.

Provident Law’s church and nonprofit attorneys are here to answer questions and to aid in establishing and crafting policies designed to reduce risk of personal injury. And we are also available to defend your church should a claim arise. We recognize how essential the missions of nonprofit and religious organizations are for society, and we stand ready to counsel and serve the churches and nonprofit organizations of Arizona. Contact us to learn more.