Non-Profit Tax Basics

Tax Accounting - Complete Controller

It’s common knowledge that tax exemption is challenging; it takes a lot of time and effort to get it done correctly. The 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 for running a proper business.Complete Controller. America’s Bookkeeping Experts

Determine Your Charitable Organization Type

Choosing the right organizational type is a crucial initial step in obtaining tax-exempt status for a charitable organization. The options include trusts, corporations, associations, sole proprietorships, and partnerships. Each type has distinct legal structures and implications, influencing liability and governance and separating personal and organizational assets. The decision hinges on the nature and scale of charitable activities. Once the organizational type is determined, it paves the way for fulfilling specific legal and regulatory requirements essential for tax-exempt status.

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. It is one of the most essential steps in developing the procedure for tax accounting for non-profits. Some critical documents could include the articles of incorporation, any paperwork related to trust, or organization articles. Ensure all needed documentation is accurate, complete, and consists of all vital information.

After gathering all the vital 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). Form 1023 is about thirty pages long and requires you to fill out all the necessary information from what you gathered.CorpNet. Start A New Business Now

Maintain Tax-Exempt Status

Tax accounting for your non-profit business allows the organization to maintain its tax-exempt status after successfully getting the exemption. It is necessary to abide by the various rules and regulations set forth by the IRS to keep the tax-exempt status. The non-profit cannot become a for-profit to maintain tax exemption. It has to remain owned by the public, and the organization’s management is conducted by the board of directors and the board officers. These boards 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 challenging to do, but the members usually have voting rights and use them to make crucial decisions. Such decisions also include making amendments to the organization’s articles or the company’s operational bylaws and electing new non-profit organization members.

An essential part of having a tax exemption is to have a detailed record of every transaction conducted while determining the tax accounting for non-profits. Most organizations use a double-entry transaction system to allow you to have all the necessary documentation involved in the paper trails. Under the IRS-recognized tax-exempt status, senior management’s responsibility is to restrict particular activities and file all the paperwork on time when they are due for submission. Cubicle to Cloud virtual businessTax 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
  • They are permitted 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, 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.

Understandably, the IRS would need to increase the scrutiny of non-profits and charitable organizations due to fraudulently registering as a non-profit to avoid taxes while earning money for the founders. This increase in scrutiny affects legitimate non-profits due to the challenges in getting the status.


In conclusion, obtaining and maintaining tax exemption for non-profits demands meticulous documentation, adherence to IRS regulations, and vigilant governance. The intensified IRS scrutiny, although necessary, adds complexity, emphasizing the critical role of accurate tax accounting in sustaining non-profit status. Upholding transparency, ethical practices, and compliance becomes paramount in navigating the evolving landscape of non-profit tax responsibilities.

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