You have always wanted to give back to your community, and a nonprofit seems like something you would love to set up.
You know that nonprofits serve limitless populations, existing to make differences in the communities they serve without making a profit other than money to be held in reserve for future programs; and you understand that any money raised by a nonprofit is used to fund programs and pay overhead costs.
Different Types of Nonprofits
You also know that many nonprofits are public charities: animal charities such as the Humane Society; environmental charities such as the Sierra Club; international charities such as religious organizations’ charities; health-based charities such as the American Cancer Society; educational charities such as Teach For America; and arts and cultural charities such as the New York Foundation for the Arts.
But did you know there are also private charities, chambers of commerce, business leagues, state-chartered credit unions… actually, 29 different types of organizations that are deemed nonprofit? And each type has its own set of accounting and tax rules. You may already have an understanding of general tax and accounting principles but wonder just how different accounting can be with a nonprofit.
The Basics of Accounting
First off, you need to determine what category your nonprofit falls under. This will help you determine your specific accounting and tax compliance requirements. But to get you started, here are some basic accounting differences between nonprofits and for-profit corporations:
- Tax status: nonprofits are mostly exempt from income taxes; for-profit corporations or their owners must pay income taxes.
- Financial statements: a nonprofit is required to prepare a Statement of Financial Position, Statement of Activities, Statement of Functional Expenses, Statement of Cash Flow, and Notes to Financial Statements; for-profit corporations need to prepare a Balance Sheet, Income Statement or Statement of Operations, Statement of Cash Flows, Statement of Stockholders’ Equity, and Notes to Financial Statements.
- Reporting of total assets minus liabilities: nonprofits report them as net assets (the investors don’t get equity in profits) with further breakdown for “with donor restrictions” and “without donor restrictions”; for-profits report them as stockholders’ equity with further breakdown for paid-in capital, retained earnings, and minus treasury stock.
If this seems totally foreign to you, you might want to purchase nonprofit accounting software to help you manage the financial aspects of your nonprofit and help you prepare these specialized statements. Or if you can afford an accountant who specializes in nonprofits, that could be an option as well. It is imperative that your nonprofit is transparent and that finances are managed meticulously if you want to stay compliant and retain your nonprofit, tax-exempt status.
Tips For Staying Transparent
There are a few things to remember when trying to stay transparent, compliant, tax-exempt, and successful:
- Each service your nonprofit performs should be a separate program with separate accounting of revenues and expenses.
- File tax returns on time.
- Keep financial records to backup the information included on your tax return.
- Do not donate to political candidates or make political statements that can be connected to a particular candidate.
- Work only within the parameters of the type of nonprofit you are set up as.
- Follow your donors’ wishes–if there are donor restrictions in place, only use those funds for the programs the donor desires.
- Make sure funds are being used only for charitable purposes and not for personal benefit. Salaries should be reasonable. The bulk of the money coming in should be going toward the programs themselves and not the management and administrators and overhead costs.
Your nonprofit will succeed or fail depending on if you can maintain your tax-exempt status. Keeping meticulous financial books, filing tax returns on time, and following politically-based compliance rules will go a long way in keeping that status.
Your nonprofit will succeed or fail depending on how many donors are on board. Your financials must be in order to keep your donors happy and willing to continue to fund your services and programs. They want to see exactly where their money is being used and want to know that their funds are benefitting those in need and not being wasted. Accounting for a nonprofit is different than accounting for a for-profit organization, but it isn’t impossible to manage. Be informed about specific rules for your particular type of nonprofit, understand the different types of financials to prepare–and be willing to purchase software or hire a professional to manage your finances if needed, and keep meticulous records to stay transparent to donors and tax-exempt compliant.
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