Q&A #168 – Is a newly formed nonprofit required to file Form 990-N for its first short tax year?
Question: I recently formed a new nonprofit organization, and we are in the process of submitting our Form 1023 application. The organization was formed only a few months before the end of the calendar year and has only had approximately $7,000 in revenue so far. Are we required to submit a Form 990-N even though our first year will be short (less than 12 months) and the organization’s 501(c)(3) status has not yet been approved?
Answer: Most nonprofit organizations are required to submit a federal tax filing for their first partial or short tax year even if their tax-exempt status has not yet been approved, but there is no monetary penalty for failure to file if the organization qualifies to file the Form 990-N (e-postcard). Nonetheless, it is usually prudent to file Form 990-N for the first tax year anyway.
It is common for the first tax year of a new nonprofit organization to be a partial or short year (i.e., less than 12 months). This can happen, for example, when an organization is formed in September and decides to use the calendar year for fiscal and tax filing purposes. The first tax year in this case would only be about 4 months long, and this organization was likely focused less on programs and fundraising than on formation tasks and planning for the future. In these situations, the new organization often has received very little revenue in its first tax year aside from a small amount of seed funding from its founders, and consequently may be eligible to file the Form 990-N (e-postcard).
An organization that has existed for less than 1 year and received revenue (or pledges from donors) totaling $75,000 or less for its first tax year will qualify to file the Form 990-N for that tax year, which is an alternative to the longer and more complex Form 990 or Form 990-EZ. Note that as time goes by the test for eligibility shifts to a limit of $50,000 in revenue for the year, averaged over a three-year period.
Most organizations seeking tax-exempt status are required to file Form 990, 990-EZ, or 990-N for each tax year even while they are awaiting IRS approval. However, as the IRS has stated in its Publication 4221-PC, Compliance Guide for 501(c)(3) Public Charities (which can be found at this link), there is no late filing or other monetary penalty for failure to file the Form 990-N.
Nonetheless, there are good reasons for an organization to file the Form 990-N for its first short tax year even though there are not monetary penalties for failure to do so.
First, tax-exempt organizations that fail to timely file their required federal tax returns for 3 consecutive years will have their tax-exempt status automatically revoked. Thus, skipping the first Form 990-N can be the first step toward losing an organization’s tax-exempt status. This is surprisingly common, especially for organizations that wait a year or two to file their Form 1023 or Form 1024 application and lose track of their annual filing obligations.
Second, filing the Form 990-N for the first tax year can help a new organization establish good compliance habits by prompting it to start keeping track of filing deadlines (for example, through the use of a finance calendar).
And keeping up with Form 990-N filing obligations as early as possible can help to project a good image to potential grantors and donors, as well as the public in general. An organization’s filing history is viewable on the IRS Tax Exempt Organization Search page and other public websites. Missing a year or two of filings in the beginning of an organization’s existence could be a red flag to some grantors or donors.
Planning Tip – Newly formed nonprofit organizations must be thoughtful when establishing their fiscal year end / tax year. This decision has many consequences impacting cash flow, program schedules, financial reporting, the due date for filings and registrations, public support test calculations, and more. Moreover, changing the fiscal year end can have numerous downsides that are often overlooked. An organization’s tax year is generally not considered fixed until it files its application for tax-exempt status or (if earlier) its first Form 990, 990-EZ, or 990-N, so take the time to make sure the choice is optimally aligned with the organization’s future operations, programs, funding cycles, and other factors.
Be aware that a new organization may run into issues when trying to file a Form 990-N, which is filed electronically via the IRS website. This is because a new organization whose tax-exempt status has not yet been approved may not be recognized in the IRS database for Form 990-N eligibility, even if the organization has received its employer identification number (EIN). If this happens, you will need to contact the IRS Tax Exempt and Government Entities Customer Account Services line at 877-829-5500, as discussed in the IRS Form 990-N Electronic Filing System (e-Postcard) User Guide (which can be found at this link).
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