Tax Planning
While running a 501 nonprofit business with a focus on helping improve the world, you must ensure your nonprofit bookkeeping is up-to-date. Current, accurate records ensure that your nonprofit stays in top shape so you can continue doing your life-changing work.
While a for-profit organization must ensure the accurate recording of financial data to answer stockholders, nonprofits have a somewhat different goal. Nonprofits must ensure that their financial situation is such that they can uphold the mission and answer to their members and board. A nonprofit must also provide the completion of specific bookkeeping reports and filing of IRS forms due to tax-exempt status.
Both nonprofits and for-profit organizations share the same objective of accurate and transparent financial disclosure. However, the information each type of entity must report to the government is different. For instance, nonprofits require a statement of financial position. The purpose of this form is to state the nonprofit's net assets. For-profits prepare income statements while nonprofits prepare reports of activities. Nonprofit assets are also broken down differently than for-profit companies.
You must focus on various tasks to get your nonprofit bookkeeping system created and running efficiently — some of which are exclusive to a nonprofit. Many small nonprofits elect a volunteer treasurer to oversee the bookkeeping. You also must learn how to record in-kind (goods and services) donations and create budgets and certain financial statements specific to the nonprofit status.
Here are the steps to beginning a nonprofit bookkeeping system:
This specific system allows you to record and organize all your receipts, including in-kind contributions and monetary donations, into separate accounts. You must also record disbursements made, track petty cash transactions, and deal with accounts payable, accounts receivable, and payroll. Consider using a cloud-based system to protect your information and ensure the data is available when you need it.
It's essential to have a bank account dedicated to your nonprofit. You never want to receive, hold, or disburse money from a personal bank account. This will create confusion and may lead to legal issues. Find a bank that holds accounts meant explicitly for nonprofit organizations.
Before the start of your fiscal year, determine a realistic operating budget. This plan should project income and expenses. To set up the budget, determine the goals of your nonprofit, how much it will cost to achieve those goals and estimates on income.
Expected income sources include corporate contributions, fundraising income, grant income, in-kind donations, and revenue from events. Typical expenses include payroll, vendor and contractor payments, and costs incurred during fundraising.
Many nonprofits review the company budget quarterly or semi-annually to ensure everything is on track financially and using resources efficiently. You may find it necessary to alter the budget if things aren't lining up financially. Most nonprofits have their budget approved by their board of directors.
While it's great to hope for a substantial amount of money raised during fundraising efforts, ensure a strong future for your nonprofit by planning realistically. Use historical data regarding how certain fundraising efforts performed in the past to prepare for a realistic return on your fundraising plans.
It's vital to record in-kind donations correctly. In-kind contributions refer to volunteers who give the organization time through their services. They'll do this as an act of charity for your organization. For instance, a lawyer may offer a few hours of their time to consult on legal matters for your nonprofit.
The IRS views in-kind donations differently than cash donations. That means you need to enter the fair market value of the contribution into a separate income account in your bookkeeping system and file IRS Form 8283 with your nonprofit tax return. If the lawyer typically charges $200 an hour and works for two hours, you will record $400 into the in-kind account. If you receive in-kind donations of more than $5,000, the IRS requires that you have such offerings appraised by an expert.
Nonprofits have rules about what they can spend money on. This necessitates an organized system, including purchase orders, which allows for tracking expenses. Purchase orders are documents provided by vendors when you purchase goods or services for the nonprofit. Purchase orders spell out what you ordered, and the cost. They’re considered binding contracts.
Financial statements give you a bird's-eye view of where your nonprofit is financially. These reports are also essential to present to your board of directors, help facilitate filing for taxes, and create future budgets. There are three main types of financial statements that every nonprofit requires. These are the statement of financial position, statement of activities, and statement of cash flow.
The nonprofit statement of financial position is similar to the balance sheet for for-profit companies. This document highlights the company's financials at a given moment in time. The report shares the nonprofit's net assets. This figure comes from subtracting what the company owes (liabilities) from what the company owns (assets). The total is the nonprofit's net assets.
Also known as the operating statement, the statement of activities is similar to a for-profit income statement. This document shows how profitable your nonprofit has been over a specific period. The total is determined by subtracting expenses and losses from revenue. The resulting statement shows changes in assets.
The statement of cash flows lists all your nonprofit's cash generated from operations, investing, and financing.
In addition to maintaining your 501 status, you need to file other documents at tax time. This includes Form 990. This document discloses your nonprofit's finances to the IRS, including revenue, expenses, and changes to net assets. Your nonprofit will also be subject to various other taxes, including sales and real estate tax. IRS Publication 557 will help you determine all the required tax forms.
Inefficient bookkeeping at a nonprofit can take time away from vital functions such as fundraising, spreading awareness, and meeting with potential partners. Let Swyft Books handle all these bookkeeping particulars so that you can focus on your company's incredible work improving the world. Get your free trial today!