When you run a nonprofit organization, every dollar you save matters. Nonprofits survive and thrive based not only on how much money they bring in, but also on how much money they can save every year, particularly during tax season.
You might already know that you are exempt from certain taxes. But your nonprofit organization can also take certain tax deductions that can reduce its taxable income and may even net you a significant tax return. Today, let’s break down six of the most common tax deductions nonprofit organizations can take advantage of.
What Taxes Are Nonprofits Exempt From?
All legitimate nonprofit organizations are exempt from federal income taxes, according to the IRS tax code, subsection 501(c). To be a nonprofit organization, the organization has to engage in public and private interest activities without the goal of pursuing profit. Nonprofits also have to meet rules, such as:
- Being organized for charitable, religious, public safety, or scientific activities exclusively
- Turning over all income, minus expenses, to individuals or organizations that are lawful and legitimate charities
Common nonprofit organizations include churches and private foundations. By default, all nonprofits are exempt from federal income tax, in addition to property taxes and sales taxes. So anytime a nonprofit company or one of its agents makes a purchase related to business, any sales tax from that purchase can be written off later down the road.
However, your nonprofit organization might also qualify for other tax deductions. Tax deductions are reductions to your gross income, which can move your business into a different tax bracket or reduce how much it owes in taxes each year. In some cases, you might reduce your income so much that the federal government will provide you with a tax refund, which you can funnel back into your business operations or use as a financial cushion.
Let’s take a look at six tax deductions to take advantage of in the future.
Wage Deductions (Plus Holiday Bonuses)
For starters, all nonprofit organizations can deduct the wages that it pays to employees. This includes any holiday bonuses. Since your wages are likely one of your biggest expenses annually, this is a deduction you can and should keep in mind at all times.
However, any deducted wages have to be “reasonable” for the services performed by the employee. You can also be penalized if you pay excessive compensation, such as to an organization’s founder or executive.
Keep this tax deduction in mind if you pay for freelancers or contractors (since you do not normally pay volunteers or interns). With freelancing becoming increasingly common as over a third of Americans are now making their living from freelance work, it’s important for businesses and nonprofits alike to be knowledgeable about how to handle freelancer-related payments and finances come tax time.
Repair Expense Deductions
In addition to the above deduction, you can deduct certain repair expenses.
More specifically, nonprofit organizations can deduct any expenses from minor repairs. For example, if your water pipes burst at your building and you have to pay a few hundred dollars for repairs, that repair bill can be deducted from your taxes at the end of the year.
However, if you engage in or pay for any major renovations, you have to treat those as capital improvements. They can be written off over time, but not deducted like a standard tax deduction. Therefore, you can’t rebuild or renovate your nonprofit organization’s HQ or other building and write it off entirely.
Fringe Benefits Deductions
Sometimes, your nonprofit organization may pay employees certain fringe benefits. For example, if you give your employees health insurance and retirement plans, and you make contributions to those policies, you can deduct those payments per the IRS.
The fringe benefits deduction also applies to less common benefits, like the material value of employer-provided mobile devices or achievement awards that include financial bonuses.
Training and Licensure Deductions
Depending on your nonprofit organization’s niche or industry, your employees might need to get professional licenses to conduct their work legally and safely. If you have to pay for licenses or training classes, you can deduct the costs of those expenses at the end of the tax year. This is also true for continuing education credits: a major concern in the law and medical industries! This deduction also counts for any ancillary costs for training, like books, supplies, and outside instructor fees.
Marketing and Advertising Deductions
For your nonprofit organization to be successful, it probably has to market and advertise its services or products regularly. Marketing and advertising expenses can be quite expensive, even for organizations that aren’t a part of the for-profit market.
If you spend money on marketing and advertising activities, you may be able to deduct the costs of those activities. Generally, your marketing and advertising activities have to be not-for-profit, just like the rest of your business’s activities. You can ask an attorney tax-related questions if you aren’t sure whether you can deduct your advertising costs for the year.
Capital Losses and Net Losses Deductions
Lastly, you can deduct certain types of capital losses and net losses.
Since your organization is not a for-profit entity, you cannot write off any financial losses in general. But you can report capital losses or net losses, which are any losses that were not incurred on capital assets or equipment. You can accomplish this by filling out Form 990-T.
In a nutshell, if you lose money because you sold real estate or other organizational holdings, keep the documentation from that sale so you can prove that you lost money overall in the course of the deal. Once this is done, you can then deduct those losses and keep your organization safe from an IRS audit.
The above six tax deductions can help your nonprofit organization save money during tax season, helping you achieve your goals and pay your staff without stretching your budget. But that’s just one way to maximize business efficiency and financial flexibility.
Gravity Payments can also help your nonprofit organization thrive. With Gravity Payments, you can get access to adaptable payment solutions for your customers, donors, and much more.