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Form 990 or 990-EZ - Schedule N for Waterbury Connecticut: What You Should Know

For most nonprofit organizations, the tax code says they have to prepare and file Form 990. But you don't have to be a nonprofit to file one. Nonprofits have more flexibility and can use any form -- tax, 1099, Form 990, Form 990-EZ, or even a combination of the two. Form 990 has an extremely broad definition of the word “substantially.” The “substantially” language is in all the information-rich sections of the tax code. The word substantially means that the organization needs to show the actual dollar amount of their “income.” They have to prove that the amount is more than the average amount of nonprofit organizations, not less. It's a big task in any organization, but it's even bigger in nonprofits, which must spend hundreds of thousands of dollars on overhead in order to be considered “charitable.” Organizations that aren't organized as nonprofits can't claim substantial deductions, but Form 990 provides a list of tax-exempt organizations that meet the statute's tests for being tax-exempt. The IRS says that organizations with high costs -- salaries for top staff, advertising and promotion costs, office supplies and office equipment -- are more likely to be recognized as charities. In order to have a tax-exempt status, organizations have to spend a minimum amount of money on their operations. Since nonprofits can spend thousands of dollars a year on overhead, the definition of substantial spending means the value of the actual labor costs of the operation, plus the value of all the other things the organization pays for: the office space, the board members' salaries, the volunteer and clerical staff, and the equipment. But there's another way the IRS defines substantial spending: for those groups that report their activities on Form 990-EZ, the IRS says an organization's total operating expenses must exceed 45 percent of “your net assets.” In other words, if the net assets of your organization are 55,000, but your operating expenses total 180,000, they must be more than 50 percent of that. Those expenses are often what makes or breaks nonprofits. If the organization's operating expenses are more than 45 percent of its net assets, it will have to pay an excise tax of 1.4 percent of each dollar over the 45 percent maximum. And even if the “net assets” of a group are 150,000, but your organization's expenses total 240,000, it still has to pay the excise tax of 0.

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