Non-profit accounting principles and practices

Leadership & Responsibility

Chapter 27 covers the principal tax requirements for not-for-profit entities. There are several issues that affect not-for-profits, including tax status, filing requirements, state tax reporting issues, donor-advised funds and restrictions. Every organization needs to pass a test to become a charitable organization-based for tax purposes. This is to ensure that only charitable ventures receive tax exempt status, to avoid having for-profit entities defraud the American people. Private foundations are subject to different taxation than public charities, and these taxes include on sponsorship and unrelated business income, and also investment income. It is legal obligation for managers to understand the tax status of their organization and file/pay taxes according to the laws surrounding that status. Most charitable organizations also need to meet the conditions of that status, including the prohibition on lobbying and political activity.

E-commerce is an emerging field for charitable organizations, because it creates new means of raising funds, and with respect to earning income. The IRS is currently working to update the legal framework for e-commerce endeavors or not-for-profit entities. The tax treatment of corporate sponsorships comes with strict guidance when it appears in online format, for example, so the ethical leader needs to understand this legal framework.

Exempt organizations still need to file an annual information return with the IRS, and private foundations have their own forms that they need to submit to the IRS as well. For organizations such as private foundations that need to pay taxes, there is an electronic filing option. The chapter goes into detail all of the elements of financial reporting for different types of non-for-profit entities, highlighting specific points of policy guidance along the way. The author makes a point to remind the reader that states usually have their own needs with respect to the information not-for-profit entities must provide to the state. The issue of donor-advised funds is also raised, since donors can sometimes insist that funds are used for specific purposes, thus the necessity of creating such funds. The tax treatment of donor-advised funds is outlined.

Chapter 28 covers auditing. A special type of audit is the A-133 audit, which the author outlines in detail and differentiates from a financial statement audit. Some findings need to be reported, and most auditor findings should be addressed by management because they represent something that is wrong with the financials of the organization.

Chapter 29 covers bookkeeping. As with accounting, there are different types of bookkeeping as well. The first of these is the simplest, cash-basis bookkeeping. Cash basis is a simple ledger that tracks cash transactions. Every transaction has an offsetting credit and debit. This allows every movement of cash to be understood, so that all expenses and sources of revenue are known. A trial balance is basically a cash-basis balance sheet.