What Nonprofits Need to Think About When Preparing for Tax Season
For many nonprofit leaders, tax season can feel confusing, technical, and a little intimidating. Even though most nonprofits don’t pay income tax in the same way for-profit businesses do, they still have important reporting responsibilities — and missing them can have serious consequences.
Preparing for taxes isn’t just about compliance. It’s also an opportunity to strengthen financial transparency, improve internal processes, and demonstrate accountability to donors, boards, and regulators. With the right approach, tax season can become a manageable — and even valuable — part of your organization’s annual rhythm.
Here are the key things nonprofits should be thinking about as they prepare for tax season.
1. Know Your Filing Requirements
One of the first steps in tax preparation is understanding exactly what your organization is required to file.
Most tax-exempt organizations must file one of the following each year with the IRS:
Form 990 – for larger nonprofits
Form 990-EZ – for mid-sized organizations
Form 990-N (e-Postcard) – for very small nonprofits
Which form you file depends on your annual gross receipts and total assets.
In addition to federal filings, nonprofits may also have state-level requirements, such as:
State charitable registration renewals
Annual reports with the Secretary of State
State tax or information returns
Knowing your obligations ahead of time helps prevent missed deadlines and unnecessary stress.
2. Keep Clean and Organized Financial Records
Accurate financial records are the backbone of a smooth tax season.
Throughout the year — and especially before filing — nonprofits should ensure that:
All income and expenses are recorded properly
Bank and credit card accounts are reconciled
Donations are categorized correctly
Grants and restricted funds are clearly tracked
Program, administrative, and fundraising expenses are separated
Disorganized books can lead to rushed filings, mistakes, or follow-up questions from the IRS or state regulators.
Using cloud-based accounting software and consistent document storage can make tax preparation far easier for both your team and your accountant.
3. Understand and Track Unrelated Business Income (UBI)
Many nonprofits assume that because they are tax-exempt, all income is tax-free. That isn’t always the case.
If your organization earns unrelated business income — revenue from activities that are not substantially related to your mission — you may owe taxes on that income and need to file Form 990-T.
Examples of unrelated business income can include:
Advertising revenue
Rental income (in some cases)
Sales of products unrelated to your mission
Certain sponsorship arrangements
Identifying and tracking UBI throughout the year makes tax season much smoother and helps avoid surprises.
4. Prepare Accurate Donor and Contribution Records
Nonprofits rely on donors — and donors rely on you for proper documentation.
As you prepare for tax season, make sure you have:
Records of all donations received
Proper donor acknowledgment letters for contributions over $250
Clear documentation of in-kind donations
Accurate valuation of donated goods or services
Strong recordkeeping not only supports your tax filing, but also builds trust with supporters and protects your organization in the event of an audit.
5. Review Payroll and Contractor Reporting
If your nonprofit has employees or independent contractors, tax season includes important reporting responsibilities.
You’ll need to ensure:
Employee wages, benefits, and withholdings are accurate
W-2 forms are prepared and distributed on time
W-9s are collected from contractors
1099 forms are issued where required
Misclassifying workers or filing incorrect forms can result in penalties, so it’s worth reviewing payroll carefully before year-end.
6. Revisit Restricted Funds and Grant Reporting
Many nonprofits receive restricted grants or donations that must be used for specific purposes.
As part of tax preparation, consider:
Were restricted funds used appropriately?
Are grant expenditures properly documented?
Are fund balances accurately reflected in your records?
These details often appear on Form 990 and are closely reviewed by funders, boards, and regulators.
Clear tracking of restricted funds also helps demonstrate accountability and transparency.
7. Ensure Governance and Compliance Are in Order
Form 990 doesn’t just ask about finances — it also asks about governance and policies.
Before filing, nonprofits should review whether they have:
An active, informed board of directors
Conflict of interest policies
Whistleblower policies
Proper document retention procedures
Clear financial oversight practices
Strong governance not only supports compliance but also strengthens your organization’s credibility.
8. Plan Ahead — Don’t Wait Until the Deadline
One of the biggest mistakes nonprofits make is treating tax preparation as a last-minute task.
Starting early gives you time to:
Clean up financial records
Address potential issues
Ask questions
Make strategic decisions
Avoid rushed, stressful filings
Working closely with your accountant throughout the year — rather than only at tax time — can make the process far smoother.
Final Thoughts
Preparing for taxes as a nonprofit is about more than just completing forms. It’s an opportunity to reflect on your financial health, strengthen accountability, and ensure your organization is positioned for long-term success.
By staying organized, understanding your obligations, and working proactively with an experienced accounting team, you can approach tax season with confidence instead of anxiety.
If your organization would like support preparing for tax season, partnering with a knowledgeable nonprofit accounting firm can help you navigate requirements, reduce risk, and focus on what truly matters — your mission.