It is common knowledge that tax exemption is not an easy task; it takes a lot of time and effort to get it correctly. 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 includes similar accounting procedures that go into running an ethical business.
Determine your charitable organization type
The first task is to determine the type of charitable organization you run, whether it is a trust, corporation, or association. A charitable organization can be a sole proprietorship or a partnership. There are many different organizations to choose from. You should choose the organization you relate with the most.
Filing proper tax accounting for non-profit
After determining your organization type, the next step is to collect all the necessary documentation needed for the tax-exempt status. This is one of the essential steps in developing the procedure for tax accounting. Important documents could include the articles of incorporation, any paperwork related to the trust, or reports of the organization. Ensure that all the needed documentation is accurate, complete, and does not miss any critical information.
After gathering all the critical 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). The report is about 30 pages long. This is the form that requires all the necessary information. You can also gather information and study to ensure you complete these steps accurately.
Maintain tax-exempt status
Tax accounting for non-profits allows an organization to maintain its tax-exempt status after successfully getting the exemption. To ensure you keep the exempted status, it is necessary to abide by the various rules and regulations.
To keep the exemption, it is essential to enlist that the public owns the non-profit. The board of directors conducts the management of the organization. The board officers are allowed to make important policy decisions, including overseeing all non-profit organization activities.
It is necessary to protect the board of directors from any case of personal liability. Sometimes, it may seem like a difficult thing to do, but the members usually have voting rights, and they use it to make crucial decisions. Such decisions also include making amendments to the articles of the organization or the company’s operational bylaws and 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 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 activities and file all 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. Make sure you are prepared for your taxes.
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