KPMG Spark Blog
Let’s take a closer look at what nonprofit accounting is, how it’s different, and why accountability is key for nonprofit success.
People at nonprofit organizations are often asked: Why are you working at a nonprofit? Or, what motivated you to start a nonprofit? And many people respond that they want to contribute to something more – call it the “greater good”.
While a nonprofit’s mission is the reason for its existence, knowing the nonprofit accounting and legal requirements is critical for its success. While for-profit businesses focus on income earning potential, nonprofits focus on impact, but additionally are required to follow a set of compliance rules and procedures to ensure accountability to their donors and contributors - not to mention the federal, state, and sometimes local governments. That makes accurate and complete nonprofit bookkeeping a necessary activity in complying with the myriad rules applicable to nonprofits. For the purposes of this article, "nonprofit" is generally referring to those organizations that are tax-exempt.
Nonprofit accounting requires a unique bookkeeping approach to support the planning, recording, and reporting of the nonprofit’s finances. This reporting is key to nonprofit accountability – both keeping the nonprofit in compliance with legal requirements and assuring donors and contributors that their funds are being used appropriately. Above all, transparency is paramount for nonprofits.
There are five key documents that every nonprofit organization manager should become comfortable with:
● Statement of Financial Position: This is the equivalent of a for-profit’s balance sheet. It provides a snapshot of an organization’s finances and liquidity through the presentation of its assets and liabilities.
● Statement of Activities: This is the equivalent of a for-profit’s income statement. It shows how assets change over time as contributions and other revenue come in and expenses are paid.
● Statement of Functional Expenses: This document shows how funds were spent by general function, for example, salary, programming, fundraising, etc.
● Statement of Cash Flows: This document simply shows how cash flows changed over time.
● Annual Report: This is the nonprofit’s opportunity to tell the story of what it has done in the prior year. It goes beyond just the bank statements and financial results, but also provides valuable information to its stakeholders and the public about the accomplishments of the organization. For example, it may include the nonprofit’s areas of programmatic focus, the number of people served, the benefits it brought to the community, its number of donors, and so forth.
Because nonprofit bookkeeping aims to ensure accountability to donors and contributors, nonprofit accounting must include recognition of donation restrictions. Many funders want to ensure their gifts or grants are spent on programs designated for specific purposes. Nonprofit accounting requires the allocation of funds, or fund accounting, into either restricted funds or unrestricted funds. This keeps nonprofit accounts organized and strictly designated by purpose.
In addition to fund accounting, most nonprofits run multiple programs or projects in tandem. This means the nonprofit often will need to keep records – let’s call them “sub-ledgers” – in which they separately record the revenue and expense related to each program or project. Different projects often have different funders, which generally require reporting not only on the organization as a whole, but also on the progress of their funded projects. Thus, ‘project accounting’ becomes a critical need of the organization for communication with grant-makers and donors. It also helps the organization to determine the financial status of any particular project and whether it is incurring expenses consistent with the revenue received or expected for that project.
Remember the nonprofit’s mission for the greater good? Applicable law and accounting procedures for nonprofits include a non-distribution constraint, preventing the nonprofit’s assets from inappropriately being given to executives, board members, or any other individual or for-profit entity. Any operating surplus must be “reinvested” in the nonprofit’s cause and not improperly distributed to private interests.
A gift accepted by a charitable organization must only be used for the charitable purposes of the organization at the time the gift was accepted. This is true even if the organization changes its purpose or dissolves later. Charitable use of the donation is required even if the donor did not expressly place any restrictions on the gift. Stated differently, the money a nonprofit receives must be used for the charitable purposes for which it was given – your mission for the “greater good”.
This restriction is further supported by a requirement that the nonprofit’s resources may not impermissibly benefit private parties. Thus, while a nonprofit may pay its employees a fair wage or salary, the organization’s charitable funds can’t be used to pay excessive compensation or bonuses based on the net income of the organization. Similarly, the nonprofit cannot pay more than fair market value to vendors, contractors, or other parties.
When the nonprofit is thinking about how it organizes its operations and tracks its funds, it’s very important that the nonprofit establish mechanisms to track where its funds are spent, and how much is spent in order to maintain complete records demonstrating that no payments exceed fair market value.
Accurate tracking of expenses, as well as contributions and other revenues, is also important for meeting disclosure requirements. In order to provide transparency to the public with respect to nonprofits’ operations and finances, most nonprofits (excluding churches) are required to file annual information returns with the Internal Revenue Service (IRS) and often with state authorities as well.
Generally, nonprofit organizations that earn less than $50,000 in gross receipts for the year must file with the IRS a very brief Form 990-N, also known as an e-Postcard. Nonprofit organizations that earn over $50,000 for the year will be required to file a more detailed return: a Form 990-EZ, a Form 990, or a Form 990-PF.
● 990-N: Gross receipts are less than $50,000; you may still choose to file a full return (i.e., the 990-EZ or the 990), but are not required to.
● 990-EZ: Gross receipts are less than $200,000 AND total assets are less than $500,000.
● 990: Gross receipts are more than $200,000 OR total assets are more than $500,000.
● 990-PF: Required for tax-exempt organizations that are “private foundations” regardless of annual receipts.
In addition, if a nonprofit has unrelated business income, it must file a Form 990-T with the IRS, reporting such income and the amount of unrelated business income tax due.
Generally, a nonprofit’s IRS Form 990 series return is due on the 15th day of the 5th month after the end of its fiscal year. So, if a nonprofit’s tax year ends on December 31st, its return is due on May 15th of the following year. A nonprofit may seek a 6-month extension for its filing by filing Form 8868. In the case of a calendar year-end nonprofit, the extended due date would be November 15th of the following year.
Organizations that fail to meet their filing requirements may face penalties or possible revocation of their tax-exempt status, if they fail to file for three consecutive years.
Bookkeeping for nonprofit organizations is unique with specific requirements and guidelines. Equipping your nonprofit with a software platform configured to plan, record, and report financial information as discussed above will streamline your process, safeguard against non-compliance, enhance transparency, and support the overall goals for your nonprofit. If you are considering new software to support the accounting needs of your organization, remember to consider those that can record detailed revenue and expense information, produce the various financial reports discussed under section 1, above, support programmatic and project accounting, and be able to organize revenue and expenses across programmatic, investment, management, and fundraising activities.
The tax preparers at KPMG Spark are experienced accountants, well-versed in the issues nonprofits face, and dedicated to the success of your nonprofit - so you can focus on fulfilling your greater good. KPMG Spark’s managed, online bookkeeping with real-time support can help ensure that accounting and tax requirements are met with ease for your nonprofit.
The KPMG Spark team of accountants will contribute to your nonprofit’s overall success by providing year-round support, data, and guidance with a software platform configured specifically for your nonprofit. You don’t have to tackle your accounting or tax compliance on your own. KPMG Spark can provide the bookkeepers and resources to support your nonprofit during return preparation and throughout the year. Contact KPMG Spark today and visit with an accounting specialist dedicated to your nonprofit success and return preparation.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP.
This blog article is not intended to address or provide advice concerning the specific circumstances of any particular individual or entity and does not constitute an endorsement of any entity or its products or services.
Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.
The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
KPMG LLP does not provide legal services.
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