"Nonprofit" is a tax status reserved for organizations that provide some type of public service. This does not mean a nonprofit cannot make a profit. What it does mean is that there are accounting guidelines that a not-for-profit businesses must follow. If these nonprofit reporting requirements are not fulfilled, a not-for-profit business will lose its tax status.
- There are specific government requirements for tax-exempt status for the nonprofit. If these requirements are not met, a nonprofit will lose its tax exempt status. These requirements include: filing an IRS Form 990 annually, using of fund-type accounting procedures, and providing a public service.
- Nonprofits receive funding in several ways. Some charge a membership fee, hold fundraisers, receive grants, or receive donations of time and money. All of these donations must be accounted for. Fund accounting separates all support and programs. All of a nonprofit's income must be accounted for.
The IRS requires that a nonprofit show that all support collected will be used specifically for the service and operation of the nonprofit programs. It is required that all nonprofits file a Form 990 every year. If a nonprofit does not file, it will no longer be eligible for tax-exempt status.
Larger donors and most grantors require detailed statements of how their donation is used. This, too, is so that the IRS will have proof that the donation is legitimate.
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