Don't assume that since the federal government doesn't tax most nonprofit income that it doesn't require nonprofits to comply with tax-reporting requirements. Just like for-profit businesses, nonprofits need to report income, file tax returns, and file documentation to make certain their special status isn't being used to the benefit of private individuals or to further non-exempt purposes. Avoid these tax traps that many nonprofits stumble into:
Not filing required returns and reports: The Internal Revenue Service (IRS) carefully monitors the revenue, expenses, and activities of nonprofit organizations and requires them to file annual returns and reports to retain their tax-exempt status. Fines can be stiff for organizations that fail to comply.
Not filing complete or accurate returns: Not all duties in nonprofit organizations can be safely delegated to well-meaning volunteers. Tax forms are technical documents that require the attention of someone skilled in completing them.
Paying unreasonable compensation: Paying board members and executives more than what's justified by the market can result in a prompt loss of your organization's tax-exempt status and in penalties for all those involved.
Deviating from the tax-exempt mission: The IRS grants nonprofit organizations exempt status to carry out specific missions. So, if you engage in non-exempt activities, your organization's exempt status may be terminated.
Allowing the organization's property to be used personally by employees: Nonprofit assets must be used for nonprofit purposes (and only nonprofit purposes). For example, it isn't all right to decide that land for a youth camp program should instead be used as the site for a vacation home for board members.
Entering into transactions where a clear conflict of interest exists: Nonprofit funds should never be diverted to lucrative business transactions that benefit board members or executives (or their families). Nor should the organization's assets be used for other types of loans or perks.
Not filing state tax returns in all states in which the nonprofit does business: States can be picky about what occurs within their borders. So, they have their own reporting requirements that must be satisfied.
Engaging in activities that generate income from sources unrelated to the organization's mission: When nonprofits compete with private-sector businesses, they must pay taxes on the activities that generate the unrelated business income.
Ignoring or not responding to correspondence from the IRS: Volunteer staffing and overlapping duties can cause critical notices to fall through the cracks. Don't let this happen to your organization.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
