5 Considerations for Accounting for Nonprofits

June 26, 2015

Nonprofits (or “not-for-profit entities” as we, accountants, dearly call them), have an entirely different company structure, mission and goals than for-profit companies. This means that the way you do accounting and report to the IRS is also different. If you are just starting a nonprofit and think that you don’t need to file any taxes, you should definitely read this post from our Maryland nonprofit accounting experts to help you get your books set up right from the start.

Tax-exempt Status of Nonprofits

If your nonprofit gets approved under section 501(c), you receive a tax-exempt status. What this means is that you will be exempt from paying federal income taxes. But if you want to receive other kinds of tax relief, you would need to individually apply for exemption from Maryland income tax, Maryland sales and use tax and Maryland property tax. Not all nonprofit organizations qualify for these exemptions, so it’s worth checking with your Maryland CPA to make sure you know which tax you are required to collect.

Statement of Activities

Where for-profit companies have an income statement or statement of operations, nonprofits have a statement of activities. Just because you are a nonprofit, doesn’t mean you don’t have any money coming in. In fact, with no money you won’t be able to provide any services to society. So to document all the expenses and contributions, nonprofits use a statement of (financial) activities. Some companies call it a budget report or a profit and loss statement, but this doesn’t change the purpose of the document. And the purpose is to provide an overview of the nonprofit’s net asset fluctuations over a specific period of time.

The statement of activities is frequently used internally to help the board members understand the current status of affairs and plan for the future. This document shows whether the organization is on track with its financial and philanthropic goals and what adjustments need to be made. In case of an IRS audit, these documents will also be helpful.

QuickBooks Setup

If you want to keep a good record of your financial data, it’s worth investing in specialized accounting software such as QuickBooks. QuickBooks has a special edition for nonprofits, but it’s currently for desktop computers only. If you want to take advantage of all the cloud features QuickBooks Online has to offer, your software would need some fine-tuning after the installation to ensure that only necessary features are enabled. Not all functions and settings in QuickBooks will apply to your nonprofit, and it helps to have a Maryland QuickBooks expert guide you through the setup and show you how to properly enter data. Building your QuickBooks company file and chart of accounts correctly from the start is crucial for your future accounting success.

Budgeting

One of the biggest challenges in budgeting for nonprofits is that funding sources are not always secured by the time you need to put together a budget for the next year. Therefore, annual, monthly and program-specific budgets may undergo ongoing adjustments. This is when it’s essential to have a pulse on your financial data with the help of QuickBooks or another software. Looking back at past years and comparing budgets to actual spending will allow you to make a more accurate prognosis.

Outsourcing Accounting Functions

As a nonprofit, you have to be extremely selective about which job opportunities you create, because money is always tight. And if you are just starting out and don’t have a large staff and a big office, it may make sense to outsource accounting functions to your local Maryland CPA. For the fraction of the money you would pay a full-time in-house accountant just out of college, you can hire a seasoned on-demand CPA with years of experience in the nonprofit industry.

Feel free to get in touch with Relate CPA if you have any questions about accounting or starting a non-profit.