Accounting concerns for non-profit organizations differ from for-profit companies. Here, the accounting professionals at Fitzpatrick, Leary & Szarko provide an understanding of the differences, which can be critical to non-profit operating success.
Understanding and Allocating the Budget
Every organization that has operating costs needs working capital, and non-profit organizations are no exception. This means developing a workable budget each fiscal year. If an organization has been around for a year or more, using past budgets to determine the next year’s budget is easiest, but adjustments must be made for various factors including inflation, and previous allotments that missed their mark. If a non-profit is in its infant stages, monetary allotments for each branch of the organization will need to be estimated. This is a process for which the help of an experienced accountant will be invaluable.
For non-profits with many separate programs/departments, it can be useful to have each department develop their own budget for approval. This gives each manager the autonomy and responsibility for the accountability and success of the budget, as opposed to relying on the accuracy and organization of one individual.
Non-profits can have several different revenue streams, each with their own unique accounting requirements. Sources of income for a non-profit can be fees for goods and services, individual donations, bequests, corporate contributions, government grants, investment income and membership dues and fees. Contributions to a non-profit can be both monetary and non-monetary. Examples of non-monetary contributions include free rent, donated services and donated materials. It is important to properly account for all revenue streams, both monetary and non-monetary.
A non-profit can receive tax-exempt status from the IRS by filing a Form 1023, which allows them to operate under Code Section 501(c). Qualifying for tax-exempt status requires that an organization meet many standards specified by the IRS, and that a non-profit exists solely for scientific, literary, charitable, religious or educational purposes. Once you are approved by the IRS to operate as a non-profit, a Form 990 (Return of Organization Exempt from Income Tax) must be filed each year. The Form 990 is available to the public once it is filed with the IRS and it provides the IRS and the public with financial and non-financial information about your Organization. Donors may use the Form 990 to determine if they will contribute to an Organization.
Unrestricted and Restricted Contributions
While unrestricted contributions can be used for any purpose, restricted contributions must be used solely for the purpose stipulated by the donor. An Organization should keep track of restricted contributions and must keep documentation that shows the restricted contribution was used in the manner intended by the donor. A non-profit not only has a moral obligation to honor a donor’s wishes, but they are also required by law to do so. If a donor restricts a donation to a particular purpose and the nonprofit does not comply, the donor can demand a refund and take legal action against the non-profit.
Because it can be difficult for a non-profit to generate revenue, grants are often used as an alternative method of funding for projects and initiatives. A non-profit can apply for federal or private grants, for which there will be grant-specific requirements, stipulations and instructions on how the grant money is to be used. Keeping detailed records of grant use is critical to ensuring that your non-profit remains compliant to those terms and can continue relying on grants in the future.
Non-profit organizations are required to break down each natural classification of expense (salary, rent, office, etc.) between program, management and general, and fundraising. Program service expenses are costs related to providing the non-profit’s programs and services in accordance with its defined mission. Management and general expenses are costs related to administering the day-to day activities of the non-profit. Fundraising expenses are all costs of activities that relate to an appeal for financial support. Some costs are easy to directly allocate to one category or another. Often times, however, an expense may need to be allocated between all three categories based on a reasonable allocation method. Many donors are interested in the functional expense allocation and use this as a basis for determining if they contribute to a non-profit.
Many non-profit organizations, especially at inception, are eager to cut costs. But, accounting is one area where short-cuts should not be taken. The financial records for a non-profit are far more complicated than a for-profit organization, and there are many factors that contribute to maintaining a tax-exempt status.
Failure to document revenue in all forms can lead to disastrous consequences for a non-profit. It is easy to develop a reputation for questionable financial practices in the non-profit world, which can lead to a sharp decline in contributions and the overall success of the organization. Hiring a skilled and experienced accountant is an investment that will create financial stability and success for the duration of your non-profit’s existence.
To speak with an accounting professional well versed in the non-profit sector, contact the accounting professionals at Fitzpatrick, Leary & Szarko.