KPMG Spark Blog

Bookkeeping for New Non-Profits

When people enter the world of not-for-profit work, they typically do so to support a cause and find fulfillment in their work. While non-profit organizations are important to a healthy society, they still have to follow strict regulations like any for-profit organization, with an additional few actions and exceptions along the way. This blog will highlight those differences and lay out a framework to give your non-profit a healthy start. Here’s a quick overview:

The Set Up

Running a non-profit is no doubt exciting and rewarding. Whether you’re looking to start up the next helpful organization for your community, or get your existing non-profit on a healthy track, let's take a look at the basics of bookkeeping when starting your organization.

Designating a person and a place to be in charge of money is probably the single most important place to start, and is often overlooked! The best way to do this is by electing a treasurer or financial officer, and opening a bank account specific to your organization – non-profits shouldn’t use a personal bank account. That way all of your bookkeeping can be left in one place; no more searching around for receipts and sifting through personal bank accounts.

Once you have a designated bank account, have your treasurer look into a bookkeeping system to make her or his job simpler and more effective. Your bookkeeping system should be responsible for financial actions such as recording and organizing receipts, keeping track of transactions, and recording disbursements.

 KPMG Spark is staffed with KPMG qualified CPAs who understand the specifics of non-profit bookkeeping. The Spark bookkeepers provide up-to-date financial statements, as well as helpful insights into your organization’s unique processes. You can schedule a demo today to see how KPMG Spark can jump start your non-profit bookkeeping.

 Next, we’ll look into some of the actions that are specific to nonprofit organizations.

Tracking In-Kind Contributions

While for-profit organizations have shareholders to appease, nonprofits have donors to thank and cultivate. That’s where tracking in-kind contributions comes in. Donations can come in all sorts of ways, such as monetary contributions (like cash donations) or volunteer work from a contractor donating their time to help you build facilities – the contractor’s time is an “in-kind” contribution. Whether your treasurer is keeping track of your books on an excel spreadsheet (which may be totally sufficient), or you’ve hired a KPMG Spark professional to take care of your books, you will need a separate income account on your books to keep track of in-kind donations. The receipt for these donations is usually based on their fair market value.

Fair market value is what a “willing buyer would pay and a willing seller would accept for the property, when neither party is compelled to buy or sell, and both parties have reasonable knowledge of the relevant facts”, as defined by the IRS.

It’s important to note that the IRS allows you to determine a value for “small” donations below $5,000. If above $5,000, you may need to get the donation formally appraised by an expert.

These in-kind donations are unique to nonprofit organizations and will contribute to special financial statements like your statement of activities. Using these statements, you can then begin to budget your activities accordingly.

Budgeting

As with any organization that deals with money, good budgeting strategies are essential for a successful path forward. Budgeting not only helps your non-profit stay in control of its finances, but it gives you a framework for when you can spend and when you should fundraise. Here are a few tips to get the most out of your budgeting plan:

Review and Project: By using up-to-date financials like the ones provided by KPMG Spark, you’ll be able to look back on what and where you spent and received income. Reviewing your past activities is one of the best ways to predict future ones. This will also give you insight on where you can use your money more effectively in the future.

Set Goals: Your budget is worthless if you don’t have an idea of what your organization is trying to achieve. Before spending any money, take some time to get your team together and determine your goals. One year, three year, and 10 year goals can be useful to identify and budget for.

Estimate Donations: While this metric can make or break a nonprofit organization, it’s important to predict your income to the best of your ability. This is another way to budget for the year. Be realistic! Nothing is more dangerous to a good idea than unrealistic expectations that can ruin any momentum or credibility you’ve worked to obtain.

Taxes

Yes, taxes still exist for nonprofits(!), although they typically come with some exemptions. Nonprofits can typically qualify for these exemptions by applying for exemption under tax code Section 501. It’s important to note that before an organization can file with the IRS, they must first obtain official nonprofit status from their state officials. The IRS uses Section 501 when exempting taxes of charities, nonprofits, religious groups, and other organizations.

While section 501 exempts nonprofits from paying most income taxes, they aren’t totally free from paying everything – there are certain taxes on unrelated income and potential excise taxes as well. Additionally, your organization may still be required to file one of the Form 990 series, which discloses financial information to the public (similar to publicly traded companies) – and your organization may be required to file a state return as well. Hopefully this transparency only shows your organization’s stability and transparency to your community.

Putting it all Together

Nonprofit organizations run under many of the same principles as any other business. By streamlining financial reporting and creating a solid budget plan, your nonprofit will be well on its way to success. Just don't forget to file the correct forms with your local and federal governments!

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.

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