Closing a nonprofit: the final Form 990 and Schedule N

Organizations close for many reasons: the mission is accomplished, funding ran out, or a merger makes more sense. Whatever the reason, winding down properly protects the board, makes sure the assets end up where the law requires, and stops the IRS from sending letters about missing returns years later.

How the IRS learns you have terminated

Most organizations tell the IRS on their final annual return or notice. According to the IRS, notice of a termination closes the organization's account in IRS records, removes it from the exempt organizations listing and should stop letters about missed returns.

Don't send a separate letter to IRS Exempt Organizations Determinations instead. The Schedule N instructions say it no longer issues letters confirming termination.

Documents to attach

The final 990 or 990-EZ must be supported by a certified copy of the articles of dissolution or merger approved by the state. If one isn't available, attach the board resolutions approving the dissolution or merger and any plan of liquidation.

When the final return is due

Terminating closes the tax year early. The final Form 990, 990-EZ or 990-PF is due the 15th day of the 5th month after the date of liquidation, dissolution or termination, not after the normal year end. A weekend or legal holiday moves it to the next business day.

The 990-N is a notice, not a return, and works differently. A 990-N filer that terminates before the end of its normal year should submit its final e-Postcard as soon as reasonably practicable after the start of what would have been its next tax year. See Form 990-N and Form 990 due dates.

Schedule N, part by part

Schedule N (Liquidation, Termination, Dissolution, or Significant Disposition of Assets) is filed with the 990 or 990-EZ. An organization that has completely ceased operations completes Part I. One still winding up at year end doesn't complete Part I yet but may need Part II.

Line 1 lists the assets distributed and the transaction expenses paid:

• a description of each asset or category of assets
• the date distributed
• its fair market value and how it was determined (appraisal, comparables, book value)
• each recipient's EIN, name and address
• the recipient's IRC section if tax-exempt, such as 501(c)(3), or its type of entity

Payments of $10,000 or more to attorneys, accountants or others for help with the wind-down are listed separately as transaction expenses.

Lines 2a to 2e ask whether any officer, director, trustee or key employee has become, or will become, a director, employee, contractor or owner of a successor organization, or will receive severance or other payments because of the dissolution. Any "Yes" needs a name and explanation in Part III.

Lines 3 to 6 ask whether assets were distributed as the governing documents require, whether the organization had to notify the state attorney general and did, whether all liabilities were paid under state law, and how any tax-exempt bonds were handled.

If all assets were distributed, total assets and total liabilities at year end on the balance sheet (Part X) should be zero.

Where the assets go

A 501(c)(3)'s assets are permanently dedicated to exempt purposes. On dissolution, Publication 557 says they must be distributed for an exempt purpose, or to the federal government or a state or local government for a public purpose. They can't go to members, directors or other private individuals.

In practice:

1. Pay or settle debts and obligations first, as state law requires.
2. Follow the dissolution clause in your articles. It usually directs remaining assets to one or more 501(c)(3) organizations.
3. Confirm each recipient's exempt status before transferring.
4. Document every transfer: board approval, value, date, recipient. Schedule N asks for all of it.

Gifts with donor restrictions can raise state-law questions, so review them early. Other exempt organizations, such as 501(c)(4)s and (c)(6)s, follow their own documents and state law.

State requirements

The IRS reminds organizations that the state where they are organized may have its own dissolution procedures. Requirements vary, but states generally expect articles of dissolution filed with the secretary of state, and many require notice to, or approval from, the attorney general before charitable assets are distributed. Organizations registered to solicit in other states may need to file final reports there too. See state charity filings.

Organizations that don't file annual returns

A church or other organization that has no annual filing requirement but received an IRS determination of exemption sends its termination documents to the IRS TEGE Correspondence Unit: articles of dissolution or signed minutes approving dissolution, a list of the last officers and directors with phone numbers, and, for a 501(c)(3), an officer's signed statement describing the final distribution of assets. The IRS termination page gives the current mailing address and fax number (855-204-6184).

Private foundations: section 507 basics

A private foundation ends its foundation status only through section 507, which offers four routes:

• Transfer all net assets to public charities that have existed and qualified for at least 60 continuous months. No notice to the IRS and no termination tax are required.
• Voluntary termination by notifying the IRS and paying the termination tax.
• Operating as a public charity for 60 continuous months after giving advance notice.
• Involuntary termination for willful, repeated or flagrant violations, with the termination tax.

A foundation can also transfer its assets to another private foundation and then terminate with no assets, and so no tax. Dissolving the entity under state law is a separate step from ending foundation status. See Form 990-PF.

Final payroll and other returns

If the organization had employees:

• File a final Form 941 (or 944) for the quarter of the last wage payment, check the box saying the business has closed, enter the date final wages were paid, and attach a statement naming who will keep the payroll records and where.
• Give each employee a Form W-2 by the due date of the final 941, and file Form W-3 with Copy A.
• File a final Form 940 if the organization was subject to federal unemployment tax. Most 501(c)(3) organizations are not.
• File Forms 1099-NEC for contractors paid during the final year as required.

If the organization had unrelated business income, a final Form 990-T may also be due.

990IRS.com is a private company, not the IRS. This page is general information, not legal or tax advice for your organization. Example organizations and figures are hypothetical.