There is a contrast between the financial principle of a nonprofit organization and a regular company. However, the primary purpose of a nonprofit organization is awareness or fundraising for a social cause. The government and the public scrutinize their every move.
Unlike profit-generating ventures, a nonprofit organization relies on fundings and public support in donations, program revenue, and grants. They must prove the credibility of their financial records how, when, and where the money is spent—all to be clear in the public eye.
Taxation laws are different and complex for nonprofits. Therefore, Nonprofit accountants must keep the organization’s books up to date in conformity with state and federal regulations. Failure to keep the books to legal requirements jeopardizes the organization’s tax-exempt status and exposes it to legal risk.
Here are some details to give you an idea of tax accounting for nonprofits.
Tax exemptions and deductions
Most charitable and fundraising organizations can apply for tax exemption from federal income taxation.
According to section 501 of IRS:
This tax code section pertains to charitable, nonprofit, and religious organizations exempt from paying federal taxes to the IRS.
While the IRS and federal law may determine tax-exempt status, state law determines nonprofit status. As a result, before filing for tax-exempt status, the IRS needs you to secure a nonprofit group from your state.
While they can exempt from income taxes, there can be exceptions if the organization has generated revenue by working outside their set scope and unrelated to their mission & vision. Then they will be responsible for tax payments on this profit if their gross income is more than one thousand dollars. It is called unrelated business income tax UBIT.
However, up-to-date tax accounting strategies can help to reduce taxable profits. A nonprofit organization can deduct any payments paid to corporate officials as well as wages provided to employees. They can deduct maintenance and repair charges, loan interest, employee benefit programs, and charitable contributions. They can record any losses experienced while attempting to earn profit through commercial activity.
To develop effective accounting strategies, the first step is a nonprofit-friendly bookkeeping system. There are many manuals to automate options for bookkeeping. But the primary goal of this is to obtain receipts that should be recorded and organized (i.e., donations or in-kind contributions). You should keep track of spending (i.e., payouts from funds your nonprofit controls or expenditures it makes), Keep track of your cash disbursements, accounts receivable, accounts payable, and payroll.
Nonprofits are not required to pay taxes, but they must produce a yearly return to explain how they spent their cash and met their objective. Tax-exempt organizations are set to an extremely high standard. Donors, the government, the media, and the public can expect to scrutinize their operations. As a result, their financial statements must demonstrate their mission. In addition, if a nonprofit organization fails to file an annual report or submits it late, the IRS may levy penalties and taxes.
As discussed above, bookkeeping can help in tax accounting as well as generating financial statements. Getting these statements ready as quickly as possible during tax season can be time-saving and stress-free. There is a more straightforward way. It is preferable to let your nonprofit accounting software prepare the financial statements required for nonprofit tax accounting most of the time.
Profit-based businesses leverage the profit and loss statements to describe their income & expenses. Whereas nonprofits must submit a detailed and precise account of activities to show income generated and cost. The information of activities, also known as the operational statement, is the nonprofit equivalent of the revenue statement. These incomes obtain funds, donations, and grants. And costs include the utilities, wages, rent, office supplies, etc.
In nonprofit tax accounting, two types of financial statements are prepared for external evaluations:
- Cash Flow Statement: Descriptions of Cash inflows and outflows.
- Functional Expense Statement: Describes the expenses incurred throughout the reporting period.
Hence, a proper taxation system is a crucial part of any nonprofit organization. And with tax accounting, nonprofits can do their level best.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 platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO 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.