5 Things Nonprofits Should Do Before Tax Season
As an individual, tax season can be one of the most stressful times during the year. However, as a nonprofit, you don’t need to worry as much about paying annual federal taxes for your organization. 501(c)(3) organizations don’t need to pay taxes. That’s why your team completed a fair amount of paperwork at the onset of establishing the organization — to ensure this tax exemption.
Even if you’re not paying taxes, your nonprofit still needs to file tax forms to maintain its tax-exempt status. This annual form that you need to file is called a Form 990.
Form 990s break down your nonprofit’s revenue and expenditures into various categories. They also provide an opportunity to explain your services to the government, prove you’re providing value to the community, and essentially confirm that you deserve to maintain the exempt status.
No one likes dealing with taxes and tedious government forms. So we’ve compiled some tips to help your nonprofit get the most out of tax season as painlessly as possible. These tips include:
- Analyzing your statement of functional expenses.
- Knowing which Form 990 you should file.
- Hiring an accountant to help you with your annual filing.
- Creating this year’s annual budget.
- Ensuring effective accounting reports for the future.
Tax season may seem like a hassle, but it’s our goal to make it a little bit more manageable. Ready to start learning more? Let’s dive in.
1. Analyze Your Statement of Functional Expenses
Data is the key to any successful strategy. If you want to fundraise more effectively, you collect data through prospect research. If you want to determine the potential success of a new campaign, you look at previous campaigns for insight. Finally, if you want to file your Form 990 effectively and easily, you track data throughout the year.
Specifically, your nonprofit should keep a close eye on your statement of functional expenses to make Form 990 filing easier.
Your organization’s statement of functional expenses is used to get an in-depth look at the nonprofit’s expenditures and what those expenses were used for. It splits these expenses up by:
- Function: programming expenses, administration and fundraising
- Nature of that function: salaries, rent, supplies, depreciation, etc.
Jitasa’s nonprofit accounting guide provides a descriptive example of what your statement of functional expenses should look like:
This matrix of data corresponds directly to the information that you’ll need when filling out your Form 990. This tax form also requires your expense information to be divided up in the same manner — by function and nature.
Referring to a more detailed statement of functional expenses to file your 990 will help you ensure your information is correct across the board. It provides easy reference points so that you don’t need to go digging through lots of papers to find the information you need.
2. Know Which Form 990 You Should File
Before you get started filing your Form 990, you need to know which form you qualify for. These qualifications are based on the total gross receipts or total assets of your organization. There are three types of Form 990s that your organization may qualify for: 990-N, 990-EZ and Standard Form 990. Let’s review the basics of each to best understand which is the best option for your nonprofit.
990 Postcard or 990-N
The Form 990-N is an eight-question, electronic tax form. Because it’s online and has a straightforward approach, many nonprofits tend to be envious of those that get to file this form.
To qualify for the 990 postcard, your nonprofit must normally have gross receipts of less than $50,000. This means that only the smallest organizations file this simple form.
This is a four-page form, so it’s a little bit longer than the 990-N. However, it’s still a shorter form than the general Form 990.
Organizations that qualify for the EZ form are those with gross receipts less than $200,000 or total assets that equal less than $500,000. This means small to mid-sized nonprofits should check their eligibility for filing the EZ option.
Standard Form 990
Don’t let this option scare you too much. While this 12-page form is longer than the 990-N or 990-EZ forms, it’s still better to fill out a few pages of paperwork than pay a year’s worth of taxes.
Nonprofits that have at least $200,000 in gross receipts or above $500,000 in total assets must file the Standard Form 990.
According to this resource, “Smaller nonprofits tend to file smaller sized forms while larger nonprofits file the standard Form 990.” While an organization with fewer gross receipts or less value in their total assets could file the standard Form 990 if they want to, why would they? It’s much easier to file the shortest form possible during your tax season.
3. Hire an Accountant to Help With Your Annual Filing
IRS forms are notoriously confusing and challenging for non-accounting professionals to file. While there are some solutions that can help make the process easier, it’s not the same as having an expert on your side.
When you work with an accountant, they’ll not only make sure that all of your information is correct and complete on the form, but also that it’s turned in on time.
We recommend that you work with an accountant who specializes in nonprofit accounting. This means they’ll have ample experience working with Form 990s and will know exactly what to ask for from your organization to make tax season easier.
Working with a nonprofit accountant comes with another benefit: They can provide insight into the other aspects of your accounting needs, including diversifying your revenue streams and cutting back on expenses. For instance, they can help you determine if you’re on the way to financial health or if you need to make some adjustments in your strategy. They may even know a good audit firm that you can hire for your organization’s annual financial audit!
4. Create This Year’s Annual Budget
While your budget and your Form 990 documents are two different documents, they’re both vital to the health of your nonprofit’s financials. Plus, while you’re working through your statement of functional expenses and other documentation, it’s a great time to compare last year’s projected versus actual budget.
This is an activity you should be doing all throughout the year, but as you’re creating your annual nonprofit budget for the upcoming year, you can review all of the information from the previous year. This will help you create a more accurate budget for the coming year.
Be sure to analyze variances in your projected and actual expenses. Were there opportunities to more accurately predict these expenses? How can you better craft your next budget? When you have predictable finances, it’s much easier to file your Form 990 because everything is more organized. Plus, it goes without saying that a more accurate budget creates a better system for planning your programming.
As you craft your budget, remember that you’ll need to:
- Work with your board members. You’ll need to work with your board members and consider their opinions because they’ll ultimately be responsible for approving the budget after the process is over.
- Keep accurate documents. Save things like your income budget, your expense budget and your statement of financial position. These will serve as a good reference point later on.
Tax season is when everyone begins thinking about money. Take advantage of this! Analyze all of the important paperwork, complete your budget and take care of your Form 990 all at once. Plus, the more prepared you are with paperwork this year, the more prepared you’ll also be in years to come.
5. Make Sure You Have Effective Accounting Reports Available
A lot of the points we’ve made throughout this article have involved various documentation. From your tax forms, to your budget, to your statements of functional expenses or financial position, there’s a lot to keep track of.
While you could keep a filing cabinet of all of this paperwork, technology is better adept at keeping financial records from past years. Solutions like QuickBooks allow you to pull reports that you need at the time or save those reports in the system for future reference.
This solution will keep your nonprofit’s data organized for:
- Even easier tax filing
- Records of past budgets and statements
- FASB-ready reporting for consistency
Accounting software solutions that specialize in fund accounting for nonprofits are designed to help you keep these metrics and reports straight. You can easily pull information from a solution with nonprofit-specific features to better fill out nonprofit-specific forms and create the best reports available.
Your tax season and other accounting needs are highly intertwined. That’s why we recommend analyzing so much accounting work to ensure your taxes are taken care of. Talk to a nonprofit accountant to see how easy tax season can be when you have an expert on your side.
If you don’t have the capacity or resources to hire a full-time staff accountant, consider outsourcing your accounting functions to the experts at a firm specializing exclusively in nonprofit accounting.
Such firms can provide the level of expertise and experience necessary to keep your books accurate and in conformance with nonprofit accounting guidelines, and typically at a lower cost than hiring a staff accountant. (Plus, it’s one less staff member you’ll need to recruit, hire, train and manage, saving you additional time and money!) That lets you focus on other aspects of your organization like planning programming needs and accomplishing your nonprofit’s mission.
Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa, an accounting firm that offers bookkeeping and accounting services to not for profit organizations.