Tax Accounting for Non-Profits: The Basics

Tax Accounting - Complete Controller

It’s common knowledge that tax exemption is not an easy task; 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-profit includes similar accounting procedures that go into running a proper business. Check out America's Best Bookkeepers

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 be a sole proprietorship, or it could be a partnership.

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 most essential steps in developing the procedure for tax accounting for non-profit. Some critical documents could include the articles of incorporation, any paperwork related to trust, or organization articles. Make sure that all needed documentation is accurate, complete, and does not miss any important 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. Check out America's Best Bookkeepers

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. To keep the tax-exempt status, it is necessary to abide by the various rules and regulations set forth through the IRS. To maintain tax exemption, the non-profit cannot become a for-profit. It has to remain owned by the public at large, 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 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 difficult to do, but the members usually have voting rights, and they use them to make important 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-profit. 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. Tax accounting for non-profit also includes that: Exit Advisor

  • 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 somewhere around 2007, holding tax-exempt organizations further accountable for what they do; hence it is essential to get proper tax accounting for non-profit. 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.

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.

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