Nonprofit organizations are granted tax exemption and other advantages because their missions have great benefits to the public. However, because they can be susceptible to abuse, the grant of benefits also requires substantial reporting and transparency.
Nonprofits’ special treatment
Nonprofit organizations are afforded special treatment, most notably—exemption from federal taxation and some state taxes. Also, donations to some organizations are deductible from the donor’s taxable income.
But that special treatment is subject to important conditions and restrictions.
A nonprofit organization must employ accounting programs that ensure compliance with those conditions. Generally, the qualified purposes of a favored nonprofit are of a charitable nature. Hence, a strong accounting program serves both a compliance objective as well as the interests of its charitable beneficiaries.
Compliance with nonprofit laws and regulations requires an airtight reporting of all organization transactions, ownership, donations and unrelated business income. Comprehensive nonprofit accounting software will generate reports with complete content and format required by governmental forms.
Unfortunately, typical commercial accounting software does not incorporate the special considerations and regulatory requirements of nonprofits. Some of the special features of nonprofit reporting requirements include:
- Identifying the exempt purpose for which the organization is formed and operated.
- Tracking and reporting classifications of donations, including grants, dues, pledges, bequests, etc.
- Keeping records of donors’ classifications and special acknowledgments of donations over $250.
- Tracking and reporting of organization earnings.
- Tracking and reporting of the organization’s exempt activities.
- Tracking and reporting of private interest benefits from organization earnings.
- Recording of transactions with disqualified persons.
- Reporting of excess benefit transactions with disqualified persons.
- Maintaining records of transactions with supporting organizations or supported organizations and proper classification of supported organizations.
- Accounting for and reporting unrelated business taxable income.
Commercial or Fund Accounting Software: Which is Best Suited for Your Nonprofit?
Because nonprofits can have extremely specific accounting and financial reporting needs, they oftentimes move beyond their ability to efficiently use commercial accounting products. When that happens, a move to a fund accounting software solution is necessary.
Crucial elements of a nonprofit accounting program
In order for your nonprofit organization to comply with these regulations and maintain a strong financial system to fund your mission, you should ensure your accounting software has the following crucial features.
Donation tracking by category
Why are donation categories important to track? Donations are received in different forms, including grants, dues, services, pledges, bequests, etc. You want to track them to measure the effectiveness of each category.
Also, some categories may be restricted as to their use. Maintaining accurate records will be necessary for an audit.
Reporting and budgeting features
A nonprofit must have accurate and detailed reports to withstand stringent regulatory and audit requirements.
Also, your accounting software must generate reports that definitively reveal whether and to what extent your nonprofit’s performance measures up against the charitable purposes expected by your donors.
Potential donors usually require a formal budget from the organization before considering grant applications, pledges, credit extensions or gifts. The organization’s budget system must show transparency, integrity and accountability.
Automated payment processing
Donations to nonprofits are made in many forms, including different digital forms. Nonprofits try to encourage donations by making them as easy as possible. Examples include online donation forms, text-to-give services, and other forms of digital donation.
Effective nonprofit accounting software should accommodate automated bill payments to vendors and employees. It should also be flexible so that it can be customized and configured for the specific needs of your organization.
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Integration with CRM
Customer relations management (CRM) is essential for a nonprofit organization’s reliance on donations, gifts and other altruistically motivated revenues. Unlike a commercial enterprise selling a product, a nonprofit does not connect with its donors through advertising. Instead, nonprofits must employ specialized connectivity tools like CRM software.
CRM software systems compile data from numerous sources and then filter the data into the groups or categories most fitting to the user’s operations, needs and (in the case of a nonprofit user) the charitable purposes for which it’s organized.
Internal accounting controls
Maintaining transparency and integrity is foremost among a nonprofit’s public profile. Establishing effective internal accounting controls is necessary to ensure those objectives. Separation of responsibilities and checks and balances are essential elements of internal accounting controls.
For example, the staff member physically collecting money or signing checks should not be the same as the person recording the transactions in the accounting system.
An effective nonprofit accounting system will employ these types of internal accounting controls.
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A bookkeeping system
Accounting by for-profit organizations shows profit and loss and retained earnings. Nonprofit accounting, by definition, does not show profit and loss and hence retained earnings.
Instead, nonprofit accounting primarily shows net assets. Donations, and therefore net assets, are categorized. The accounting must show restricted as well as unrestricted funds and other categories.
Nonprofit bookkeeping systems are available in simple off-the-shelf forms. More complex nonprofit operations require customized bookkeeping systems to mesh with their reporting requirements.
An essential feature of most nonprofits is the donor’s deductibility of their donations or gifts. The IRS requires that donors receive an organization’s written acknowledgment of any gifts more than $250. Your nonprofit’s accounting system should include a strong donor management function that produces the acknowledgments required for your donors.
Management, including the board, executive director, development director and program directors, need special management reports that show actual performance data compared to budgeted activities. Management reports help your management team to forecast sources and needs and make appropriate adjustments to their programs.
These reports will compare actual vs. budget figures and might include:
- Income and expense statements
- Activity statements
- A balance sheet
- Cash reports that show restricted vs. unrestricted cash
A nonprofit accounting system should readily produce external reports that are usually required by outside auditors, audit committees, lenders, supporting nonprofits and foundations from which the organization receives grants, etc.
- Statement of activities for the organization
- Statement of financial position
- Cash flow statement
- Statement of functional expenses required of larger organizations filing IRS Form 990
Get help with your nonprofit accounting and management software needs
2022 Nonprofit Accounting
Software Buyers Guide
In today’s complicated climate, is your accounting software helping you grow and achieve your mission—or holding you back? This guide will help you understand whether it’s time to make a move.
Accounting and reporting for a nonprofit organization is a highly specialized regime. At JMT Consulting, our experts can help you identify the best tools to make your organization more effective and streamlined to achieve your mission and financial goals.
Whether it’s accounting & ERP, budgeting, CRM or other tools that serve as the infrastructure for your organization’s operations, JMT Consulting will help you clearly define where you are today (point A), where you want to be (point B), and how to best make that journey. Contact us today for help with all your nonprofit software needs.