Requirements for 501c3 Tax Return

Requirements for 501c3 Tax Return

The Internal Revenue Code section 501(c)(3) is a provision that allows nonprofit organizations(charities, educational institutions etc.) to be exempted from paying certain taxes. However, according to the Nonprofit Risk Management Center, more than a hundred 501(c)(3) organizations lose the exempt status every year due to non-compliance of the guidelines. Every non-profit organization should open a bank account for better transparency.

Below are the requirements of the IRS which are regularly reviewed by them. This is to ensure that the organization continues to do the job that led them to be exempted from certain taxes.

Non-Profit Tax Return: What is required for 501c3 Tax Return?

Check out the list of things that are required for 501c3 Tax Return.

Non-Exempt Activity

All the activities and income of the organization must be solely focused only on the purpose that they reported to the IRS. For example, if your organization is a high school institution then you used your funds to give college scholarships, your exempt status might be questioned by the IRS. It is important to notify the IRS first before changing the purpose of your organization.

Personal Benefit

It is strictly prohibited for a shareholder or an insider to receive personal benefits from the organization. For the case of the employees and directors, they can receive only reasonable salary or compensation for the job completed. Extravagant salaries are not allowed- it violates the rule of IRS and may remove your organization from its exempt status.

Unrelated Business Income

This includes money made or purchased from activities that are not related to the organization’s purpose, such as office rent or selling merchandise, although some unrelated business income is allowed. The organization must pay taxes on unrelated business income and report the income on Form 990-T, Exempt Organization Business Income Tax Return.


All 501(c)(3) organizations are not allowed to participate in any political or substantial lobbying activity. This means that the organizations must not contribute to any political campaign funds or promote a candidate for the political office. Lobbying is only allowed if the expenditures are under a certain amount based on the size of the organization. Charities may file Form 5768, which allows the organization to spend a portion of their funds on lobbying; the organization may have to pay an excise tax on expenditures that are more than a certain amount. This ensures that their organization will not lose its exempt status.

Annual Report

All exempt organizations are required to file an annual report, although some organizations, including churches and those with small budgets, are exempted from this. The state where the organization is located may also require the organization to file reports annually or biannually. Many nonprofit organizations are also required to pay employment tax, excise tax, unrelated business income tax, and also state and local taxes.


ConclusionIt is important to follow all the requirements of the IRS for the welfare and the credibility of the non-profit organization. The IRS must also be informed when the organizations are making changes to avoid being removed from the Internal Revenue Code section 501(c)(3).

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