Even though nonprofit organizations do not focus on generating an income, it is still important to have proper bookkeeping habits to ensure the organization’s success.
Understanding tax implications, as well as properly recording and tracking financial data, will help you to run a successful nonprofit. This will enable you to meet your goals and supports your cause.
What is a Nonprofit?
The revenue generated by nonprofits consists of donations, grants, and investments. All these revenue streams are considered to be tax-exempt. This means they are not required to pay income tax on the money they receive.
Tax Reporting Requirements for Nonprofits
Even though nonprofits are tax-exempt, they still need to file a T2 Corporate Income Tax Return. Some nonprofit organizations may also have to fill out a Form T1044 (“Non-Profit Organization Information Return”).
The T2 Corporate Income Tax Return is an 8-page form that is due 6 months after the last date of the organization’s fiscal year. If the nonprofit organization only operates in a single province or territory, only 2 of those pages need to be filled out.
Under certain circumstances, a nonprofit organization may also have to file for T1044:
- If the organization received dividends, royalties, rentals or interest in excess of $10,000 during the year;
- If the organization owns more than $200,000 in assets;
- If the organization was required to submit a T1044 the previous year.
Navigating these forms may be tricky and you want to make sure you get it right. Contact our accountants at Liu & Associates for more information.
Financial Statements for Nonprofit Organizations
Statement of Financial Position
In the world of business, bookkeeping often involves a balance sheet that details the owner’s equity and assets. Nonprofits, however, use a Statement of Financial Position to detail its assets and liabilities of the organization as well as its net assets.
The net assets are divided into 3 categories:
- Unrestricted Assets: These assets are collected from donors with no restrictions on use.
- Temporarily Restricted Assets: These assets have restrictions imposed on them by the donor. These usually specify that the donation is used in a certain way. Temporarily restricted assets typically include an expiration date on the restrictions.
- Permanently Restricted Assets: These assets have usage restrictions that do not expire. These restrictions are usually placed on large sum donations.
Statement of Activities
These statements quantify the revenues detailed in the Statement of Financial Position.
Statement of Cash Flow
The Statement of Cash Flow tracks the flow of cash in and out of the nonprofit organization. It specifically focuses on activities held by the organization that generates and uses the cash.
Statement of Functional Expenses
This last statement documents how expenses are incurred for each area of the nonprofit organization. These areas include management, administration, fundraising and programs.
Bookkeeping Basics for Nonprofit Organizations
Accounting Software or Journal System
In order to keep your nonprofit organization organized, you need to establish a system for tracking financial transactions. These transactions include receipts, distributions (such as payouts and expenditures) and petty cash.
Open a Dedicated Bank Account for the Organization
Do not use a personal bank account for your nonprofit organization. Opening a separate bank account is important for keeping accurate records of incoming and outgoing money.
Create a Budget
Like a for-profit business, a nonprofit organization requires a budget. A simple budget plan includes expected income sources and expected expenses. It is also important to determine what your financial goals are, estimates of cost and income and see if the budget aligns with your plan.
Once you have everything in place, you need to create financial statements as mentioned above. These documents will help you keep track of where the money is coming from, where it is going and how it got there.
Common Mistakes Made by Nonprofit Organizations
Here at Liu & Associates, our accountants want to ensure that your nonprofit organization is successful. The following are common mistakes made by nonprofit organizations and how you can avoid them:
Poor Planning (Or No Planning At All)
Even though nonprofit organizations differ from revenue-generating business, the need for a plan is just as important. You may not be looking to make a profit, but a nonprofit organization still needs a vision, a goal and a plan to get there.
A good business plan includes information such as sources of funding, potential products or services to be offered. It is also important that you include a needs assessment.
No Financial Knowledge
Running a nonprofit is more than generating donations and dispersing them appropriately.
As part of the business plan, you need to consider what sort of startup costs are appropriate to get your organization running. You also need to keep good financial records. This is because although nonprofit organizations are considered tax-exempt, you still need to file taxes for it.
Assuming Taxes Don’t Have to be Filed
Again, just because nonprofit organizations are tax-exempt doesn’t mean you are exempt from filing taxes. There may be some cases where certain revenues are considered taxable. Even if those situations do not apply to your nonprofit organization, a tax return is still necessary. Otherwise, you may face the penalties of not filing.
Bookkeeping for Nonprofits is Not Impossible
But it can be confusing and challenging. Let our experts at Liu & Associates help you navigate the details of nonprofit bookkeeping. Contact us today!