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Nonprofit Accounting: From Taxes to Donations

Accounting
Article
01/08/2015

Although nonprofits aren't in business to make money, they do still require careful accounting practices. Donors who contribute to nonprofit organizations often want to know that their money is being spent to further the organization’s mission. Any signs of irregularity or financial mismanagement can cause an organization to lose monetary backing. For this reason, accurate nonprofit accounting and financial reporting is essential.

Tax-Exempt Status

The first step to correctly setting up a nonprofit's financial reporting system is to file the correct paperwork and attain tax-exempt status. Donors are incented to support nonprofits when their donations qualify as charitable contributions on personal tax returns. This means they must contribute to an IRS-designated tax-exempt organization. Each state also has individual filing rules for nonprofits. Generally, before you can accept donations, you will have to file articles of incorporation to define your nonprofit's structure, and appoint a board of directors to oversee the organization.

Track Donations

As nonprofit organizations raise funds and solicit donations, tracking and properly recording monetary contributions becomes an important function, as donors require receipts to claim tax deductions. A solid accounting system with customizable line item entries and reports will ensure that all necessary information is logged for both donors and financial reporting purposes.

Record Expenses

Conversely, donors also want to know how their money is being spent. To prepare tax returns and financial statements, expenses should be recorded and properly classified as program expenses or administrative expenses. Many donors look for organizations that funnel as much money as possible into program expenses. This ensures that their dollars are supporting the mission of the nonprofit. A large amount of overhead and administrative expenses, which includes fundraising expenses, could signal inefficiency and affect donors’ willingness to contribute.

Tax Returns

Even though nonprofit organizations are classified as tax-exempt, the IRS still requires a return to be filed. Most charities file Form 990, the return for organizations exempt from taxes. If donations received total less than $50,000, Form 990-N, or what's known as an e-Postcard, may be filed. This short form reconfirms your nonprofit’s tax-exempt status and receipts totaling less than $50,000.

Financial Reporting

In general, nonprofits require a great deal of oversight due to the handling of personal donations. Financial updates and analysis should be presented to the board of directors on a periodic basis. Also, audits may be necessary to ensure the proper controls are in place and funds are being properly used to carry out the organization's mission. In both situations, accounting software can be a valuable tool for small nonprofit organizations to create customized reports and track donations and expenses.

 

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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