Preserving your organization’s tax-exempt status is vital to your financial stability and ability to pursue your mission. Losing that exemption could result in tax liability, fewer donations and lost foundation grant eligibility. To avoid this, you must understand 501(c)(3) rules and commit to strong governance.
5 core commitments
The IRS grants 501(c)(3) status in exchange for certain commitments. Eligible organizations must:
1. Avoid private benefit and inurement. The IRS strictly prohibits insiders — such as board members, officers, or key employees — from personally benefiting from the organization’s income or assets. Even seemingly small perks can raise red flags. Compensation should be reasonable, well-documented and based on comparable data. Nonprofits should implement conflict-of-interest policies and maintain transparent records.
2. Manage lobbying activities. Nonprofits may engage in lobbying, but it must remain “insubstantial.” Lobbying includes urging lawmakers and the public to support or oppose legislation. To protect your status, track lobbying expenditures carefully.
3. Remain nonpartisan. A 501(c)(3) organization can’t support or oppose candidates for public office (known as political activity) in everything from newsletters to social media to in-person speeches, though recent interpretations of current law are questioning this. Nonpartisan voter engagement, such as registration drives, open forums or neutral issue education, is permissible.
4. Monitor unrelated business income. Revenue from activities not substantially related to a non-profit’s exempt purpose may be considered Unrelated Business Income (UBI). Earning some UBI is acceptable, but excessive reliance on it can jeopardize your tax-exempt status. Talk to a tax advisor when exploring potential earned-income strategies.
5. File annual returns. Failure to file a version of IRS Form 990 for three consecutive years leads to the automatic revocation of a nonprofit’s tax-exempt status. Reinstatement can be time-consuming and costly and could jeopardize an organization’s relationship with donors and regulators. Your board should assign responsibility for timely filings to specific individuals and create compliance calendars to stay on track.
Possible consequences
If your tax-exemption is revoked, you’ll likely need to pay federal corporate income tax. You will also lose state-level tax privileges and no longer be able to accept tax-deductible donations. In short, losing your tax-exempt status is an existential threat. To avoid that fate:
-Educate leadership and staff about compliance responsibilities,
-Document decisions and financial practices to demonstrate transparency,
-Use checklists and compliance guides to monitor lobbying, political activity and reporting obligations, and
-Seek professional advice when exploring new revenue models.
By focusing on these principles, your nonprofit can remain compliant and retain the trust of donors and other supporters.
Going forward
Protecting your tax-exempt status isn’t just about following the law. It’s about safeguarding the integrity and future of your organization. Contact Hood & Strong to ensure you stay in compliance.
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Sidebar: The Latest on the ERTC
In addition to addressing a long list of areas relevant to any business, the One Big Beautiful Bill Act tackles ongoing issues around the COVID-era employee retention tax credit (ERTC). Some nonprofits may have filed claims for this potentially lucrative refundable tax credit.
Because the IRS has been inundated with illegitimate claims since 2023, the new law prohibits the tax agency from processing certain unpaid ERTC claims that were filed after January 31, 2024. This means nonprofits may not receive expected refunds for claims tied to wages paid between July 1 and September 30, 2021, if those refunds would have been processed after OBBBA’s enactment on July 4, 2025.
Notably, the OBBBA also extends the statute of limitations for IRS audits of ERTC claims for the third and fourth quarters of 2021. The statute of limitations changes from six years from when claims were filed or April 15, 2028, whichever is later.
