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Navigating Nonprofit Compliance and Reporting Requirements: A Guide for Leaders in Northern Michigan

As nonprofit leaders in Traverse City and Northern Michigan, your mission-driven work significantly impacts our communities. However, managing a nonprofit organization involves more than just achieving your mission; it also requires diligent attention to compliance and reporting requirements. Understanding these obligations ensures your nonprofit remains in good standing with federal and state authorities, maintains donor trust, and continues to serve the community effectively.

This comprehensive guide covers the essential compliance and reporting requirements for nonprofits, including tax reporting, state-specific obligations, audits, and annual reporting. Additionally, we provide a detailed compliance checklist to help you stay on track. Let’s dive into the details to help you navigate these responsibilities with confidence.

Federal Tax Reporting Requirements

1. Understanding IRS Form 990

One of the most critical federal reporting requirements for nonprofits is the IRS Form 990. This form provides the IRS with an overview of your organization's activities, governance, and detailed financial information. Depending on your organization’s size and gross receipts, you may need to file one of several variations of Form 990:

  • Form 990: For organizations with gross receipts of $200,000 or more, or total assets of $500,000 or more.
  • Form 990-EZ: For organizations with gross receipts less than $200,000 and total assets less than $500,000.
  • Form 990-N (e-Postcard): For organizations with gross receipts normally $50,000 or less.

2. IRS Form 990-T

If your nonprofit earns $1,000 or more in gross income from unrelated business activities, you must file IRS Form 990-T to report and pay tax on that income. Unrelated business income is generated from activities not substantially related to your nonprofit’s exempt purpose.

3. IRS Form 1023 and Form 1024

New nonprofits seeking tax-exempt status under Section 501(c)(3) must file IRS Form 1023 or the streamlined Form 1023-EZ. For other tax-exempt statuses, such as 501(c)(4) or 501(c)(6), IRS Form 1024 is required.

State of Michigan Nonprofit Reporting Requirements

1. Michigan Annual Report (Form CSCL/CD-2000)

Michigan nonprofits must file an annual report with the Michigan Department of Licensing and Regulatory Affairs (LARA) by October 1 each year. This form updates the state on your nonprofit’s contact information, registered agent, and directors. Failure to file the annual report can result in penalties and potential dissolution of your nonprofit.

2. Michigan Sales Tax Exemption

Nonprofits must apply for a Michigan sales tax license to obtain a sales tax exemption on purchases made for nonprofit purposes. This license must be renewed periodically, and nonprofits must maintain proper documentation to support their tax-exempt status.

3. Michigan Charitable Solicitation License

Nonprofits soliciting donations in Michigan must obtain a Charitable Solicitation License from the Michigan Attorney General’s Charitable Trust Section. This license requires annual renewal and submission of financial statements.

Nonprofit Audits and How to Complete Them

1. When is an Audit Required?

Not all nonprofits are required to undergo an audit. However, an audit may be required if your organization receives significant funding from federal, state, or local governments, or if it is stipulated by grant agreements or your bylaws. In Michigan, nonprofits with gross revenue exceeding $500,000 must have an annual audit conducted by an independent CPA.

2. Preparing for an Audit

Preparing for an audit involves several steps to ensure a smooth process:

  • Maintain Accurate Records: Ensure that your financial records are accurate, complete, and up to date. This includes bank statements, receipts, invoices, and payroll records.
  • Review Internal Controls: Evaluate your internal controls to ensure they are adequate for safeguarding assets and ensuring accurate financial reporting.
  • Compile Financial Statements: Prepare your financial statements, including the statement of financial position, statement of activities, statement of cash flows, and notes to the financial statements.
  • Select an Auditor: Choose an independent auditor with experience auditing nonprofits. The auditor will review your financial statements and internal controls, and provide an audit report with their findings.

3. Conducting the Audit

During the audit, the auditor will:

  • Test Internal Controls: Assess the effectiveness of your internal controls by testing transactions and procedures.
  • Verify Financial Statements: Verify the accuracy of your financial statements by comparing them to supporting documentation.
  • Identify Issues: Identify any discrepancies, weaknesses, or areas of non-compliance in your financial records and internal controls.
  • Provide an Audit Report: Issue an audit report summarizing their findings and providing recommendations for improvement.

4. Addressing Audit Findings

After the audit, address any findings or recommendations made by the auditor. Implement corrective actions to improve your internal controls and financial reporting processes. This proactive approach helps ensure compliance and strengthens your organization’s financial health.

Other Annual Reporting Obligations

1. Donor Acknowledgments

Nonprofits must provide written acknowledgments to donors for contributions of $250 or more. These acknowledgments should include the donor’s name, donation amount, and a statement confirming whether any goods or services were provided in exchange for the donation.

2. Grant Reporting

If your nonprofit receives grants, you may be required to submit periodic reports to the grantor. These reports typically include financial statements, progress reports, and documentation of how the grant funds were used. Adhering to grant reporting requirements is crucial for maintaining funding and compliance.

3. Employment-Related Filings

Nonprofits with employees must comply with federal and state employment-related reporting requirements, including:

  • IRS Form W-2: Provide employees with Form W-2 by January 31 each year, summarizing their earnings and tax withholdings.
  • IRS Form 941: File quarterly Form 941 to report payroll taxes withheld from employees’ wages.
  • Michigan Form UIA 1028: File quarterly reports with the Michigan Unemployment Insurance Agency, detailing wages paid and unemployment taxes owed.

Compliance Checklist for Nonprofits

To help you stay on top of your compliance obligations, here is a comprehensive checklist for annual nonprofit compliance:

  1. File IRS Form 990: Submit the appropriate version of Form 990 (990, 990-EZ, or 990-N) to the IRS by the 15th day of the 5th month after your fiscal year ends.
  2. Submit Michigan Annual Report: File the Michigan Annual Report (Form CSCL/CD-2000) with LARA by October 1 each year.
  3. Renew Charitable Solicitation License: Renew your Michigan Charitable Solicitation License annually with the Michigan Attorney General’s Charitable Trust Section.
  4. Conduct Financial Audit: If required, arrange for an annual audit by an independent CPA and address any audit findings.
  5. Acknowledge Donations: Provide written acknowledgments to donors for contributions of $250 or more.
  6. Submit Grant Reports: Complete and submit required reports to grantors, documenting the use of grant funds and project progress.
  7. File Employment Reports: Ensure compliance with employment-related filings, including IRS Form W-2, Form 941, and Michigan Form UIA 1028.
  8. Maintain Accurate Financial Records: Keep detailed and accurate financial records, including bank statements, receipts, invoices, and payroll records.
  9. Review Internal Controls: Regularly evaluate and improve your internal controls to safeguard assets and ensure accurate financial reporting.
  10. Update Governing Documents: Periodically review and update your nonprofit’s bylaws, policies, and procedures to ensure they reflect current operations and compliance requirements.

Conclusion

Ensuring compliance with federal and state reporting requirements is essential for the success and sustainability of your nonprofit organization. By understanding and adhering to these obligations, you protect your organization’s tax-exempt status, build donor trust, and maintain financial health.

At True North Legal Group, we are dedicated to supporting nonprofit leaders in Traverse City and Northern Michigan. Our experienced attorneys can provide guidance on compliance, reporting requirements, and best practices to help your organization thrive. If you have any questions or need assistance with your nonprofit’s legal needs, contact us today. Together, we can ensure your nonprofit remains compliant and continues to make a positive impact in our community.