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.
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.
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:
- 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.About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.