Preparing for Tax Season: Key Tips for Nonprofits

‍

Tax season isn’t just for individuals rushing to find receipts or calculate deductions, it’s also a crucial time for nonprofits. While taxes may not be the most exciting part of running a nonprofit, staying organized and proactive can make the process smoother and even reveal opportunities to strengthen your organization. With a little preparation, tax season can become less of a hassle and more of an opportunity to showcase your nonprofit’s financial health and transparency.

Here’s how to tackle tax season with confidence, keep your records in order, and avoid common pitfalls—all while protecting your nonprofit with the right insurance.

Why Tax Season Matters for Nonprofits

As a nonprofit, you likely enjoy tax-exempt status, which can make tax season seem less intimidating than it might be for businesses. However, there are still critical responsibilities, such as filing your annual Form 990 and ensuring compliance with federal and state regulations. Proper tax reporting is essential for maintaining your tax-exempt status and fostering trust with donors and stakeholders.

Think of tax season as an opportunity to:

Demonstrate transparency and accountability.

Showcase your impact through financial reporting.

Lay the groundwork for future audits or funding opportunities.

Let’s dive into how your nonprofit can prepare for tax season and stay ahead of the curve.

1. Organize Your Financial Records

The first step in preparing for tax season is gathering and organizing all relevant financial records. This includes income, expenses, payroll, and any special grants or donations your nonprofit received over the past year.

What to Gather:

Bank statements and reconciliation reports.

Records of all donations, including in-kind contributions.

Receipts and invoices for expenses.

Payroll records, including contractor payments.

Documentation for grants and restricted funds.

If you haven’t already, invest in accounting software tailored to nonprofits. Tools like QuickBooks Nonprofit or Blackbaud Financial Edge make tracking and categorizing transactions a breeze, reducing stress during tax season.

2. Understand Form 990 and Filing Requirements

Form 990 is the cornerstone of nonprofit tax reporting. It provides detailed information about your organization’s activities, governance, and finances, offering transparency to the IRS, donors, and the public.

Which Form Should You File?

Form 990-N: For nonprofits with gross receipts of $50,000 or less.

Form 990-EZ: For nonprofits with gross receipts under $200,000 and total assets under $500,000.

Form 990: For larger nonprofits with gross receipts of $200,000 or more or total assets of $500,000 or more.

Be sure to file on time to avoid penalties. For most nonprofits, the deadline is May 15, but it’s always good to confirm based on your fiscal year.

3. Maximize Tax Deductions and Credits

Yes, even tax-exempt nonprofits can take advantage of deductions and credits! This is especially important if your organization engages in unrelated business income (UBI), which is taxable.

Common Deductions for Nonprofits:

Office supplies and operational expenses.

Event expenses for fundraising activities.

Marketing and promotional costs.

Employee benefits, training, and professional development.

If you’re unsure about which deductions apply, consult with a nonprofit tax professional to maximize your opportunities.

4. Review Your Insurance Policies

Tax season is a great time to review your insurance coverage and ensure your nonprofit is protected against potential risks. Proper insurance coverage not only safeguards your organization but also ensures compliance with certain regulations.

Key Coverages to Review:

General Liability Insurance: Protects against claims of bodily injury or property damage.

Directors and Officers (D&O) Insurance: Shields board members and executives from personal liability for organizational decisions.

Cyber Liability Insurance: Protects donor and financial data from cyberattacks, which are increasingly common.

Not sure if your coverage is up to date? Use tax season as a prompt to review your policies with a trusted partner like CalNonprofits Insurance Services.

5. Engage Your Board and Leadership

Tax season isn’t just the responsibility of your finance team. Your board of directors and leadership team play a vital role in ensuring that your nonprofit meets its tax and reporting obligations.

How to Involve Them:

Present a summary of your organization’s financial performance over the past year.

Highlight areas where additional oversight or support is needed.

Ensure the board has reviewed and approved Form 990 before submission.

Encouraging your leadership team to actively participate in tax preparation strengthens accountability and teamwork.

6. Plan for the Future

Once you’ve successfully navigated tax season, use the momentum to plan ahead. Consider implementing new systems or processes to make next year even easier.

Future-Ready Tips:

Schedule quarterly check-ins to review financial records and stay organized throughout the year.

Build or maintain a reserve fund to ensure financial stability.

Stay informed about changing tax laws or regulations that may affect your nonprofit.

7. Avoid Common Mistakes

Even well-meaning nonprofits can stumble during tax season. Avoid these common pitfalls:

Missing Deadlines: Late filings can result in penalties, even for tax-exempt organizations.

Incomplete Documentation: Ensure all receipts, donor records, and payroll details are accounted for.

Underreporting Income: Accurately report all revenue, including in-kind donations and unrelated business income.

By staying proactive, you can sidestep these issues and ensure a smooth filing process.

Conclusion

Preparing for tax season doesn’t have to be overwhelming. With a little organization, clear communication, and the right tools, your nonprofit can navigate this time of year with confidence and ease. It’s also a chance to showcase your transparency and commitment to fiscal responsibility, something donors and stakeholders value deeply.

While you’re reviewing your finances, don’t forget to assess your insurance coverage as part of your overall risk management strategy. Comprehensive insurance protection from CalNonprofits Insurance Services can give your nonprofit the peace of mind needed to focus on your mission.

Let’s make 2025 a year of growth, impact, and financial stability—starting with a successful tax season!

‍