How Do Taxes Work For Non-Profits?

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It is common knowledge that tax-exemption is not an easy task; it needs a lot of time and effort to get it done the correct way. Tax exemption recognized by the IRS allows you to devote your financial resources towards charitable causes instead of paying taxes. Tax accounting for non-profits include similar accounting procedures that go into running a proper business.

Determine Your Charitable Organization Type

The very first task is to determine the type of charitable organization that you run – whether it’s a trust, a corporation or an association. A charitable organization can be a sole proprietorship or a partnership.

Filing Proper Tax Accounting for Non-Profit

After determining your organization type, the next step is to collect all of the necessary documentation needed for the tax-exempt status. This is one of the most important steps in developing the procedure for tax accounting. Important documents could include the articles of incorporation, any paperwork related to the trust, or articles of organization. Make sure that all of the needed documentation is accurate, complete, and does not miss any important information.

After gathering all of the important information, you need to complete Form 1023 – Application for Recognition of Exemption Under 501(c)( 3) of the Internal Revenue Code (or Form 1023-EZ). This for is about 30 pages long. This is the form that requires all of the necessary information.

Maintain Tax-Exempt Status

Tax accounting for non-profits allows an organization to maintain its tax-exempt status after you are successful in getting the exemption. To keep the exempted status, it is necessary to abide by the various rules and regulations.

To keep the exemption, it is important to enlist that the non-profit is owned by the public at large. The management of the organization is conducted by the board of directors. The board officers are allowed to make important policy decisions including overseeing all activities of the non-profit organization.

It is necessary to protect the board of directors from any case of personal liability. Sometimes, it may seem like an arduous thing to do but the members usually have voting rights and they use it to make important decisions. Such decisions also include making amendments to the articles of the organization or the operational bylaws of the company as well as electing new members of the non-profit organization.

An essential part of having a tax exemption status is to have a detailed record of every transaction conducted while determining the tax accounting for the non-profit. Most organizations use a double entry transaction system that allows you to have all necessary documentation involved in the paper trails. Under the IRS recognized tax-exempt status, the responsibility of senior management is to restrict particular activities and file all of the paperwork on time when they are due for submission. Tax accounting for non-profits also includes that:

  • The organization must not make any contribution to any political campaign
  • The non-profit is not allowed to donate anything to any political party
  • Non-profits are allowed to conduct limited lobbying but the process is heavily restricted
  • The non-profit must not provide any revenue or profit based on its charitable activities
  • Salaries and other operational costs are permitted

Increased Scrutiny of Non-Profits

 The IRS amplified its scrutiny of charitable organizations around 2007, holding tax-exempt organizations further accountable for what they do. Hence, it is essential to perform proper tax accounting for non-profits. Continual variations in accounting and auditing standards increase costs to the certified public accountant or CPA but establishments may not have improved their budgets to sanction for that.

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