Unless your non-profit is specifically chartered to provide finance and accounting services, you probably didn’t choose the non-profit sector so you could crunch numbers all day. Yet without proper non-profit fiscal management from the start, you could very well find yourself doing a lot of number crunching just to keep your non-profit afloat, let alone profitable.

In fact, one of the biggest misconceptions about non-profit organizations is that they are not designed to (or able to) make a profit. The truth is, you want your non-profit to be profitable because that gives you the means to enhance and expand your service in your community.

In this article, learn why you need an accountant for your non-profit organization. Furthermore, learn why not just any accountant will do. You need a tax accountant in Carmel that is well-versed in how non-profit accounting is different than for-profit accounting.

 

Understanding the Main Difference Between “For-Profit” and “Non-Profit”

As a non-profit founder or leader, you already know that the biggest single factor that distinguishes a non-profit entity from a for-profit entity is the tax exemptions you get.

As a non-profit, you can apply for and be granted federal, state and/or local tax exemptions. The reason you can do this is because your charter, your reason for being, is different than that of a for-profit entity – even if you are both profitable. This also means that non-profit accounting is handled differently for your organization than it is for a company primarily chartered to make a profit.

The very first question you should ask any tax preparer in Carmel you are considering hiring is, “do you have expertise in tax preparation for non-profit entities?” It is also good practice to ask for client testimonials specific to your industry as further verification that this is the right tax preparer for your organization’s needs.

 

A Non-Profit Organization’s Tax Records Are Public Record

Another reason why you need an accountant who is experienced in business tax planning in Carmel is because your financial records are a matter of public record. This is another requirement that comes along with being granted non-profit status and tax exempt status.

You are required to operate as a financially transparent organization. Because individuals and entities can make tax-deductible donations to your cause, they are granted the right to view your financial statements. For this reason, you really want your financial statements to be accurate!

 

A Non-Profit Must File a Tax Return Annually

Just as with for-profit accounting, there are different tax reporting levels for different size non-profits. Failure to file the appropriate form at the right time each year means you risk having your non-profit, tax-exempt status revoked.

Only an accountant experienced with non-profit accounting will understand which forms you need to fill out and when to file them on your behalf so your organization is able to retain a non-profit, tax-exempt status.

 

Non-Profit Finance for Fundraising Can Be Complicated

Non-profit organizations in general are heavily dependent on donations and grant funding to stay solvent and functioning. Different funding streams have different accounting and record keeping requirements. This can make the job of your non-profit fiscal management team quite complex.

Some income streams may be available to use for general purposes while others may be earmarked for specific uses only. General funds are called non-restricted funds and specific funds are called donor-restricted funds. Not only do you need to keep each funding stream separate and accounted for, but you will need to keep detailed records of how the funds from each are used. This can be particularly important if you wish to reapply for a grant in future years.

 

Non-Profit Accounting Has Its Own Financial Statements

Yet another key reason why you need a non-profit accountant to handle your organization’s non-profit finance and record keeping is because non-profit documents are different than for-profit documents.

Balance sheet versus statement of financial position

Here is an example. A for-profit company will typically use a balance sheet to reconcile expenses with income (equity). In the world of non-profits, the right document is called a Statement of Financial Position.

The Statement of Financial Position uses the right terminology for a non-profit. Equity is now called net assets. Liabilities remain the same. Assets is the total picture of net assets plus liabilities.

Income statement versus statement of activities

Similarly, where a for-profit would use an income statement to record financial activity in each area of the business. a non-profit uses a Statement of Activities. This document shows what has changed in net assets from month to month in each funding category.

 

Tracking Non-Profit Donations Is a Full-Time Accounting Job In Itself

In recent years the Internal Revenue Service (IRS) has started to crack down on misuse of assets in the non-profit sector. This makes tracking non-profit donations more important than ever for the health of your non-profit.

Another reason why accurate tracking of non-profit donations is important is because donors are getting a benefit by giving funds to your organization.

Currently, the IRS requires that any donor who gives an amount over $250 must receive a written receipt. The donor can then use this receipt to claim a tax deduction at the end of the year.

It is important to know what information must be on this receipt and how to answer donor and potential donor questions about the tax benefits of donating to your non-profit.

Donors will also expect to be updated about how their funds are being used and have a right to know how much of each donation goes directly to funding programs and services (versus overhead and salaries).

Choosing the right accountant with the appropriate expertise is one of the most important decisions your non-profit will ever make. The right accountant can safeguard your organization’s non-profit, tax exempt status, reassure donors and boost fundraising efforts, ensure the best use of incoming assets and maximize your non-profit’s community impact.

 

Contact Savage Accountancy today for more information on how the right accountant can benefit your non-profit organization.