What is the difference between for-profit and nonprofit bookkeeping? Find out in this article and why you need bookkeeping services for your nonprofit.
When you think of a nonprofit, you might think that finances don’t matter. However, nonprofit bookkeeping is essential for having a thriving organization.
Whether you’re the founder of a nonprofit or want to work for one, nonprofit bookkeeping is a good skill to have.
You can use your skills to help the nonprofit manage finances so that the group can serve as many people as possible. But you should know the basics before you start bookkeeping.
What Is Nonprofit Bookkeeping?
Nonprofit bookkeeping is similar to bookkeeping for a for-profit business, but there are some differences. Bookkeeping requires tracking revenue and expenses for the nonprofit.
You should track whatever donations you receive as well as other forms of income. Since some nonprofits may not have much of a bookkeeping budget, you may need to use a free or low-cost method for tracking the revenue.
Also, like any organization, nonprofit bookkeeping involves tracking expenses. Of course, many nonprofits will want to keep these low.
However, every organization will have operating costs. Depending on the type of nonprofit, you may also have to account for other expenses, like major equipment purchases.
Nonprofit bookkeeping tracks all of these things for tax time.
How Does It Differ From For-Profit Bookkeeping?
While nonprofit bookkeeping is similar to bookkeeping for a for-profit business, there are some important differences.
The first difference to consider is who owns the organization. For-profit businesses typically have shareholders who invest in the business to help it grow.
However, nonprofits don’t have any owners, and the founders won’t benefit financially from the nonprofit.
The income a nonprofit receives is primarily from donations and grants. On the other hand, a for-profit company usually sells goods or services to make money.
Tracking the income for a nonprofit isn’t as easy as tracking inventory and sales.
Nonprofit bookkeeping also involves tracking assets that the organization can use to grow the organization or help the people the nonprofit serves.
Also, nonprofits are usually exempt from paying taxes. While nonprofit bookkeeping is still important, the exact software and methods differ.
A large for-profit corporation can afford to spend money on a robust accounting program. Corporations can also afford to hire a team of accountants and bookkeepers to manage finances.
However, a nonprofit doesn’t have this ability. The majority of a nonprofit’s income should go toward the primary mission of the organization.
To keep nonprofit bookkeeping costs low, an organization can opt for a free or low-cost accounting program. At first, the founder of a non-profit may want to handle the bookkeeping.
However, as the nonprofit grows, it can help to hire a bookkeeper. Then, a specialist can manage the finances for the organization.
Many nonprofits qualify for a tax exemption. However, that doesn’t mean that a nonprofit doesn’t have to file taxes.
Most nonprofits still have to file taxes, even if they don’t have to pay anything. Still, certain nonprofits don’t have to file at all.
Churches, church conventions, and church associations all don’t have to file taxes. If an organization is part of a group return for taxes, they won’t need to file separately.
Another exempt group includes organizations that have to fill a different return.
Unless your nonprofit falls into one of those categories, you will need to file a nonprofit Form 990. The filing deadline is the 15th of the fifth month after the end of the fiscal year.
One tax to be aware of is the excise tax, which applies to private foundations that have investment income. When doing nonprofit bookkeeping, it’s important to track investments to note how much the organization might need to pay.
How to Do Bookkeeping for Nonprofits
The method you use to do nonprofit bookkeeping can depend on your organization. Factors that affect it include the size of the organization, whether it’s exempt from filing taxes, and more.
Each year, you should research the changes made to laws surrounding nonprofits. Then, you can use that information to inform how and what you track.
And as your organization grows, you can decide if you need to switch to a different bookkeeping method.
If you’ve never done nonprofit bookkeeping, you should also be flexible. Because of the differences, you may need to relearn how to track revenue and expenses.
Understand the Status
Depending on the nonprofit, you may have a slightly different tax status. You should understand your status both in your state and federally.
When it comes time to file taxes, you need to make sure you file them correctly. If your organization can’t afford an accountant, understanding your status is especially vital.
You should know what the tax designation is for your organization. Of course, there are 501(c)3 organizations.
However, there are many types of nonprofit organizations with different designations. The specific designation can determine what the IRS requires for taxes.
Unless your nonprofit is one of the special types that doesn’t have to file, you need to file taxes each year. If you don’t file, you might have to pay a fee.
Go too long without filing, and the organization could lose its tax-exempt status.
By organizing forms and tracking revenue and expenses throughout the year, you can stay on top of your nonprofit bookkeeping.
It will also be easier to train a new bookkeeper on a system you already have going. If you need to hire help with bookkeeping, you can make it easier for everyone.
The creation of multiple accounting programs has helped businesses and organizations with their bookkeeping. Since many nonprofits have small budgets, it can help to find an affordable accounting program.
Hiring a professional team of bookkeepers can get expensive. While you may need one or two people, using technology to manage the books can help everyone.
Not only will it reduce costs, but it will be easier for the board of directors to access financial records.
Bookkeeping Made Easy
Whether you have bookkeeping experience or not, you should understand the basics of nonprofit bookkeeping. Many nonprofits are tax-exempt, but managing the books is still important.
If you don’t keep track of revenue and expenses, it will be much more difficult to grow the organization. You may also risk losing the nonprofit’s tax-exempt status.
You don’t have to be a financial expert to get into nonprofit bookkeeping. However, you should be willing to learn so that you can keep track of everything.
Want to learn more about nonprofit finances? Check out our recent blog posts!