It is common knowledge that tax exemption is not straightforward; it takes a lot of time and effort to get it done correctly. Tax exemption recognized by the IRS allows you to devote your financial resources toward charitable causes instead of paying taxes. Tax accounting for non-profits includes similar accounting procedures for running a proper business. The article below will teach you every step necessary for obtaining tax-exempt status.
First, You will Need to Determine Your Charitable Organization Type
The first task is determining the charitable organization you run – a trust, a corporation, or an association. A charitable organization can be a sole proprietorship or a partnership.
Filing Proper Tax Accounting For Non-Profit
After determining your organization type, the next step is collecting all the necessary documentation for the tax-exempt status. It is one of the most critical steps in developing the procedure for tax accounting. Without all the proper forms completed, you cannot move forward in the process. Essential documents could include the articles of incorporation, any paperwork related to the trust, or articles of organization. Ensure all the documentation is accurate and complete and vital information is not missing.
After gathering all of the necessary information, you need to complete Form 1023 – Application for Recognition of Exemption Under 501(c)(3) of the Internal Revenue Code (or Form 1023-EZ). This is about 30 pages long. This is the form that requires all the necessary information.
Maintain Tax-Exempt Status
Tax accounting for non-profits allows an organization to maintain its tax-exempt status after you are successful in getting the exemption. It must abide by various rules and regulations to remain exempt.
It is essential to enlist that the public at large owns the non-profit. The board of directors conducts the management of the organization. The board officers can make important policy decisions, including overseeing all non-profit organization activities.
It is necessary to protect the board of directors from any personal liability. Sometimes, it may seem difficult, but the members usually have voting rights and use them to make crucial decisions. Such decisions also include making amendments to the organization’s articles or the company’s operational bylaws, as well as electing new members of the non-profit organization.
An essential part of having a tax exemption status is to have a detailed record of every transaction conducted while determining the tax accounting for the non-profit. Most organizations use a double-entry transaction system, allowing you to have all necessary documentation in the paper trails. Under the IRS-recognized tax-exempt status, the responsibility of senior management is to restrict activities and file all of the paperwork on time when they are due for submission. Tax accounting for non-profits also includes the following:
- The organization must not make any contribution to any political campaign
- The non-profit is not allowed to donate anything to any political party
- Non-profits are allowed to conduct limited lobbying, but the process is heavily restricted
- The non-profit must not provide any revenue or profit based on its charitable activities
- Salaries and other operational costs are permitted
Increased Scrutiny of Non-Profits
The IRS amplified its scrutiny of charitable organizations around 2007, holding tax-exempt organizations further accountable for what they do. Hence, it is essential to perform proper tax accounting for non-profits. Continual variations in accounting and auditing standards increase costs to the certified public accountant or CPA, but establishments may not have improved their budgets to sanction that.
Conclusion
In conclusion, achieving tax exemption is a complex but rewarding process. Redirect financial resources to charitable causes with IRS-recognized exemption. Master the steps from organization type determination to filing Form 1023. Sustaining tax-exempt status requires adherence to rules, board management, and meticulous record-keeping.
Despite increased IRS scrutiny, proper tax accounting is vital. Organizations must navigate restrictions, uphold transparency, and manage operational costs. The commitment to compliance ensures ongoing tax-exempt status, contributing to the impactful work of non-profits.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.