Non-Profit Tax Exemption: Compliance


It is common knowledge that tax exemption is not easy; it requires a lot of time and effort to do it correctly. Tax exemption recognized by the IRS allows you to devote your financial resources to charitable causes instead of paying taxes. Tax accounting for non-profits includes similar accounting procedures that go into running a proper business.

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Determine Your Charitable Organization Type

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

Filing Proper Tax Accounting for Non-Profit

After determining your organization type, the next step is collecting all the necessary documentation 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. Ensure all the needed documentation is accurate and 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 form is about 30 pages long and requires all of the necessary information.

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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. It must abide by the various rules and regulations to keep the exempted status.

It is important to ensure the public owns the non-profit to keep the exemption. The board of directors manages the organization, and the board officers are allowed to make important policy decisions, including overseeing all its activities.

It is necessary to protect the board of directors from any personal liability. Sometimes, it may seem like an arduous thing to do, but the members usually have voting rights, and they use them to make important decisions. Such decisions also include amending the organization’s articles or operational bylaws or 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, which allows you to have all the necessary documentation in the paper trails. Under the IRS’s recognized tax-exempt status, the responsibility of senior management is to restrict particular activities and file all of the paperwork on time when it is due for submission. Tax accounting for non-profits also includes the following:

  • 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

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Increased Scrutiny of Non-Profits

 The IRS amplified its scrutiny of charitable organizations around 2007, holding tax-exempt organizations further accountable for their actions. Hence, proper tax accounting for non-profits is essential. 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 that.


In conclusion, the journey toward tax exemption for charitable organizations demands a thorough and dedicated approach, requiring careful determination of organization type, meticulous documentation filing, and adherence to IRS regulations. Maintenance of tax-exempt status necessitates stringent governance by the board of directors and meticulous financial record-keeping. The increased scrutiny from the IRS underscores the significance of robust tax accounting practices, essential for upholding the integrity and trust of charitable organizations. Despite potential cost implications, proactive compliance with evolving regulations is vital for ensuring long-term sustainability and effectiveness in serving charitable causes.

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