- IRS Rules – 990 tax return filing
Once the designation of non-profit status is received after forming the non-profit, compliance with tax filings is critical. Failing to file on time can result in crushing penalties, something that could eat up a fledgling nonprofit budget quickly. IRS penalties for non-filing the Form 990 are $20/day up to a maximum of $10,000. A CPA will keep the due dates for you to avoid these penalties and know which version of the Form 990 is required for a specific nonprofit.
- Categorizing of Expenses
In order to file the 990 accurately, the organizations’ activities will need to be organized and categorized properly. This includes the income received and the expenses. The 990 tax return requires the Statement of Functional Expense which is unique to nonprofits. This statement breaks down the income and expense along three categories: Program, Management, and Fundraising. All expenses will need to be reported to give potential donors an idea of how the organization is spending according to its exempt purpose. Additionally, grant monies may have a separate categorization that the grantor requires.
- Avoid UBIT
The lack of income taxation on the nonprofit organization makes it an attractive vehicle for establishing a charitable purpose. However, there is a major pitfall to avoid and that is following into business activities that would trigger UBIT – Unrelated Business Income Tax. Unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. A CPA should be consulted beforehand to avoid unnecessary tax exposure.
- Steward donor intent
Most non-profits rely on donors to provide a stream of income from which to operate. Donors receive a benefit on their individual tax returns for donating to charitable organizations that have received the IRS exemption. This creates a high-value relationship between the donor and exempt organization. It is of utmost importance to steward the donor’s intent for the funds they provide. Donors have the right to restrict their funds to specific purposes within the organization. These funds then become “restricted” and must be accounted for on the books as such.
While it is easy to create a website and call oneself an “accountant,” the Certified Public Accountant (CPA) credential signifies a master’s level of expertise on financial matters. CPAs must obtain the four “Es” which takes many years. These are 1) passing an Exam considered one of the most difficult, Experience in performing financial duties, Education of a university-level specific Accounting degree, and Ethics training. This credential signifies a deep commitment to the field of accounting, taxation, auditing, and business law.