Nonprofit Tax and Accounting FAQ: The Answers to Your Top 5 Questions

C
Chris Edgar Ancheta
Nonprofit Tax and Accounting FAQ: The Answers to Your Top 5 Questions
Nonprofits need to demonstrate integrity, transparency, and compliance with a whole range of governing tax laws that are unique to the sector. Finding the answers to some of your questions about accounting and finance issues can be challenging. At Scrubbed, we’re always looking for ways to make things simpler, so we took a look at five of the top nonprofit issues that clients ask us about:  

1. How do we prepare for an audit, and what will it cost?

Not every state requires nonprofits to be audited, but for those that do, the cost can vary depending on the complexity and needs of the organization. Keeping good day-to-day records and maintaining strong internal controls will help ensure that preparing for an audit is as fast and painless as possible.

Essential items to consider include:
  • Making sure everyone is on the same page with manuals and documentation, along with descriptions of any changes 
  • Ensuring that the Board of Directors and Finance Committee minutes, and listings of any new bank account numbers, etc., are in place
  • Gathering key financial documentation, including general ledger, payroll records, trial balance, financial statement analysis, and general journal entries 
  • Ensuring that you have to hand all bank statements, cash disbursements, receivables, and signed grant letters 
  • Making sure that your grant accounting memo or narrative is consistent with the previous year and that donor details and schedules of donations are up to date.
  • Ensure that books are closed for the year and all accounts are reconciled.
  • Ensure that the prior-year balance sheet in the accounting software agrees with the audited balance sheet.
For a complete rundown of all the items you need to prepare for an audit, see our Nonprofit Audit Checklist.

2. What are the annual meeting requirements for 501(c)3 businesses?

The IRS does not require an annual meeting, but state corporate laws and the organization’s bylaws will often direct the board of directors of a registered nonprofit to meet at least once a year. It is good practice to hold at least one board meeting each year to deal with the nonprofit’s essential business, such as: 
  • Approving budgets
  • Reviewing financial statements
  • Electing new officers
  • Reviewing procedures and policies
  • Hearing updates from relevant leaders about ongoing work and projects 
While the IRS does not specify the cadence of board meetings, it does require the annual filing of Form 990. One question in that form asks “whether an organization contemporaneously documents meetings or written actions undertaken during the year by its governing body and each committee with authority to act on behalf of the governing body.”  Good Governance Practices (irs.gov)

To comply with the IRS recommendation, nonprofits need to take formal minutes of any relevant meeting and keep copies. Minutes should include:
  • The date and time of the meeting and how attendees were notified that the meeting would be taking place
  • The names of present and absent board members, together with any guests
  • If a quorum was reached 
  • Summaries of any reports or information presented 
  • Any potential or actual conflicts of interest, and how they were resolved
  • The details of any resolutions or actions and next steps, including the outcome of the votes
  • The name of the person who prepared the minutes
The board must formally approve the minutes of the previous meeting as the first item of the next. 

3. How much fundraising expense is appropriate? 

Unfortunately, money doesn’t grow on trees, and nonprofit organizations have to work hard to attract donors and secure donations that will fund the mission. Typical fundraising costs include:
  • Employee time directly spent on fundraising activities and administration or fundraising training
  • Any fees paid to fundraising consultants or outsourced support from a grant writer, for instance
  • Specific campaign costs, including design, printing, and postage for fundraising collateral
  • The costs of putting on an event, such as renting a venue, publicity, food and drink, performer fees
  • Software for donor management and other fundraising tools
  • Membership dues for any fundraising organizations
While everyone wants as much money to go to the programs as possible, a nonprofit must spend a portion of its budget on fundraising and other overheads to remain sustainable. Guidance varies as to what percentage of an organization’s budget should go to fundraising costs. For instance, Charity Navigator suggests less than 10% of the budget should be spent on fundraising, while BBB Wise Giving Alliance recommends no more than 35%. 

In fact, tracking how much it costs the organization to raise a dollar in donations, or the ROI of fundraising dollars, might be a more useful KPI. Knowing the cost of raising a dollar donation provides insight into the effectiveness and efficiency of your fundraising activities and can also help you determine where your most cost-effective opportunities lie. 

4. Does my nonprofit need to be audited? 

Many states require nonprofits to submit a copy of audited financial statements as part of registering the nonprofit in the state. But ongoing audit requirements are more challenging to pin down.   

Each state has its own audit requirements, which can vary within the state depending on the size, funding sources, or activities of the nonprofit. According to the National Council of Nonprofits, some states require nonprofits that receive a certain level of state funding to submit independent audits to the state agency that provided the funding; others may require an audit if they solicit funds from the public or have a stated amount of annual revenue or expenses. Still others do not have any specific audit requirements at all for nonprofits.

Taking California as an example, state law requires that any nonprofit that has gross revenue of two million dollars ($2,000,000) or more and that is required to file reports with the Attorney General must have their financial statements audited by an independent CPA. If they have grants and contracts with governmental agencies, those government agencies may also require independent accounting of the funds. 

On the other hand, Alabama, Delaware, and Idaho (among others) have no state-level requirements for nonprofit audits.

However, even if you operate in a state that does not require it, there are benefits to being audited that you should consider. The most important is that some  major funders will only donate funds to organizations who provide audited financial statements. An audit provides assurance to donors, grantors, and the public, that the organization is managing its finances in a responsible manner. 

In addition, an audit can help identify any weaknesses in your financial management and internal controls as well as providing information that assists leaders to make better decisions about resource allocation and strategic planning. 

5. Can the founder of a nonprofit receive a salary?

Salaries for founders and executives of nonprofits are a complicated area. Nonprofits are governed by a board of directors and operate as public entities, and board members are not paid beyond reimbursement of certain expenses. Broadly, the founder of a nonprofit can receive a salary as long as it is reasonable and not excessive, and the founder is carrying out work related to the nonprofit’s mission. According to the IRS, “Reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circumstances. Reasonableness is determined based on all the facts and circumstances. “

Any salary paid to a founder must be approved by the board of directors or a compensation committee and reported on Form 990. 

Scrubbed can help

Handling tax, accounting, and finance issues for a nonprofit can be challenging. Hiring professional help can give you peace of mind and reduce the time and money you need to spend. At Scrubbed, we have helped hundreds of nonprofits fulfill their missions while meeting the highest legal and moral standards integral to their service models. 

Our team includes nonprofit experts you can tap to work closely with your CFO, with an entire in-house accounting team – or independently on your behalf to ensure that your finances are in order, in compliance, and properly communicated to regulators, donors, and other stakeholders. We also provide specialized support such as real estate accounting solutions and technical accounting support tailored to your organization’s needs.

 From tracking transactions and monitoring regulatory requirements to preparing financial statements and streamlining processes, we bring to your nonprofit the experience and expertise needed to manage all logistics involved in nonprofit accounting, so you can focus on advancing your mission and creating more impact.

 Best of all, we share your values of integrity, empathy, openness, and commitment to excellence. We are both an ideal fit for your organization’s culture and a valued asset in the eyes of those you support.

Let us help you continue to transform lives and communities. Contact us for a free consultation today.

Scrubbed Has the Answers!


Partner with Scrubbed to strengthen your nonprofit's financial operations. Contact us today for a free consultation.

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