Cash Contributions

Previously, anyone who made a contribution to the church could take deduction for the contributions on his or her tax return. If the amount was less than $250, the tax payer was allowed by the previous law to use his own written records like a log or diary of the contributions.

PPA changed this completely and under this new Act, no deduction is allowed for contributions made no matter how small the amount may be unless a bank record is maintained by the donor or the donor obtains a written communication from the donee organization showing the name of the charity and the date and amount of the contribution.

Clothing and Household Items

The pension protection act does not allow any deduction for a charitable contribution of clothing or household items unless they are in good used condition. Also no deduction is allowed for a single article of clothing or a household item whose value is more than $500 unless a qualified appraisal is attached to the taxpayer’s return.

Appreciated Personal Property

If a donor bought a painting at sale for $25 whose value now is $25,000, then the fair market value may be deducted by the owner if the painting is contributed to an art museum that will display it.

On the other hand, the deduction is limited to the painting’s tax basis: $25 if the painting is contributed by the donor to a museum who sells it within three years of the contribution.

Fractional Interests

A fractional interest is one where a donor gives away the right to possess or use an object for a given period of time.

Suppose a donor owns some valuable art collection which the donor allows the local museum to display the art collection during some part of the year, the donor is giving them a fractional interest in it. Previously this type of contribution was allowed but under the pension protection act, the following two conditions should be compulsorily met:

•  All of the interests in the property should be owned either by the donor or by the donor and the donee organization immediately before the contribution.

•  The remaining interest in the property must be contributed by the donor to the same donee organization within 10 years of the initial donation or, if earlier before the death of the donor.

Facade easements

A facade easement is an easement by a property owner who, for a price, agrees not to change the outer appearance of his or her historic home. Facade easements can be contributed, and a charitable deduction can be taken for the contribution. The facade easement deduction to easements is limited by the pension protection act that:

•   The complete exterior of the building should be preserved.
•   Any exterior change that is contradictory with the structure’s historic character should not be allowed.
•   Any deduction in excess of $10,000 must be accompanied by a $500 user fee to the IRS.

Pension Protection Act: Applicability for NPOs

SOME FACTS ABOUT THE NON PROFIT SECTOR

There are about 2.3 million non profits in the United States (corporations, trusts, associations and other forms of nonprofit organizations) and more than half of them are charitable.

The rest half fulfill other missions like promoting arts, business operation, culture and public and community goals.

Over 1.5 million nonprofits were registered with the Internal Revenue Service (IRS).

The largest single category? 501(c)(3) public charities?included over 950,000 organizations and accounted for three-fourths of nonprofit revenue and sixteenths of nonprofit assets.

The total private giving in the last year was estimated at $323.4 billion.

In 2011, approximately 31.7 percent of U.S. adults claimed to have volunteered for one or more nonprofit organization.

Volunteers approximately contributed a total of 17 billion hours during 2011.

The number of non profits have become three times since 1963. Approximately 20,000 to 30,000 new non profits are started each year.

More than 87% of non profits in the U.S. are small organizations with annual gross revenue of < $25,000 per year.

More than 53% of nonprofit organizations in U.S.A claim tax exemption determination under section 501 C 3. Amongst the remaining organizations, more than 40% organizations claim exemptions under other sections of 501 C. That leaves around 7% of organizations not claiming any tax benefits with the IRS.

Stats about US NPO sector

1. Private operating foundations
2. Grant making foundations

Private Operating Foundations

Nonprofit private foundations that run charitable programs directly with the beneficiaries are called private operating foundations

Private operating foundations do not make grants to outside organizations or individuals. Grants, if any are direct gifts to beneficiaries.

Private operating foundations normally begin their operation using contribution from a small group of members. This initial fund is called the seed-fund or the original endowment. Funds are not raised from the general public.

To meet its operational expenses, a private operating foundation relies on the returns it generates by investing the seed fund or the original endowment.

When a nonprofit organization applies for tax-exempt status, the IRS presumes that the organization is a private foundation unless it qualifies the income test as a public charitable organization status.

Grant making foundations

Grant-making foundations are also referred to as private non-operating foundations. These are entities that give money to other charitable organizations and do not carry out their own charitable activities.

If your organization is not a private operating foundation, chances are that it will be classified as a grant making foundation.

Types of Private Foundations

IRS has mandated ‘Income Test’ as a method of distinguishing between a private operating foundation and a public charity. Income test is the most important criteria for being recognized as a private operating foundation.

Income test: An organization is said to meet the requirements of Income test, if its direct operating expenses counts for at least 85 percent of the adjusted net income.

In addition to the income test, IRS also requires a private operating foundation to qualify in at least one of the following tests:.

Asset Test – A private operating foundation would qualify in this test, if 65 percent or more of the foundation’s assets are devoted to conduct its exempt activity, and these assets consist of corporate stock that is controlled by the foundation.

Endowment Test – A private operating foundation qualifies under the endowment test, if at least two-thirds of the foundation’s minimum investment return is distributed directly in connection with actively conducting its exempt activity.

Support Test – This test has three parts and all the three parts must be satisfied to qualify as a private operating foundation.

• The foundations should receive at least 85 percent of its total funds (gross contribution) from the general public or from five or more unrelated exempt organizations.

• The foundation should not receive more than 25 percent of its gross contribution from any single exempt organization.

• More than 50 percent of the foundation’s support should not be generated through investment income.

Income Test for Private Operating Foundation

1. BENEFICIARIES – The people and parties who actually use the services and goods created, distributed, or allocated by the non profit organization are the users.

2. DONORS AND FUNDING SOURCES – Those who help in funding the operations of the non profit organization are the donors and the funding sources.

3. COMMUNITY – The surrounding community as a whole has a stake in how well a non profit organization completes its mission and objectives.

4. EMPLOYEES & VOLUNTEERS – Employees and Volunteers provide vital services to keep the nonprofit running and are important stakeholders for nonprofit organizations. In return it seeks emoluments or recognition of its services. It also seeks protection from personal liabilities.About 11 million people or near about 7 percent of the entire U.S. work force comprise the United States non profit sector.

5. FEDERAL, STATE AND COUNTY ADMINISTRATION – Government at all levels is an important stakeholder for nonprofit organizations. It requires the organization to furnish periodical reports of various kinds and in return it provides the organization with benefits like tax exemptions. tax deduction, government grants and several other benefits

The non profit organizations are exempted from paying taxes and for this the following should be taken care of:

• They should not engage in political campaign activities.
• They can not diversify according to the changing markets or the community needs and must stick to the purpose for which they were established.
• They must be controlled by their own boards and can not have a management team from outside.

Stakeholders of a Typical Non Profit Organization

There are generally five possible structure options for forming a non profit organizations which are as follows:

1. CORPORATIONS – A state law creates a corporation which is generally limited by and created under statutory law. A non profit corporation is formed without the intent of generating profit. Corporations exist separately legally, they can buy and sell property and enter into contracts. But a corporation has to act through its officers and agents and can not act by itself.

A corporation can do the following:

• Set conditions for admissions and make donations.
• Buy, hold, or sell property.
• It can establish compensation for its employees.
• It can carry any business and all such activities that are not forbidden by law which can help in advancing the mission and activity of the corporation.

2. COOPERATIVES – A cooperative is generally a business that does not earn any income on its own but distributes its income to its members. This feature distinguishes a cooperative from a partnership or a corporation. The formation of cooperatives is usually as corporations under state cooperative laws and has bylaws and other organizational documents similar to corporations.

Allocating the economic benefits to its members based on the quantity of business done is the primary function of cooperatives. The purpose of the cooperative is forwarded by the Internal Revenue Code providing exemptions to cooperatives for income generated.

3. TRUSTS – A trust is generally defined as a property interest held by one person known as the trustee at the request of another person known as the settler for the benefit of a third party known as the beneficiary. Trusts play roles where the activities of a non profit are mainly concerned with the management and distribution of assets because the administration of the trust is simpler than corporations and also have fewer reporting requirements.

A property can be owned and managed by a trust in its own name and can distribute such property according to its terms since the trust is a separate entity. Trusts can be exempted from tax only if they meet the 501(c) (3) requirements. Trusts are usually used by non profit organizations in such cases where money is collected, invested or managed passively. Scholarship funds and grants for charitable purposes are generally directed through trusts.

4. LIMITED LIABILITY COMPANIES – Limited liabilities companies (LLC) are governed by operating agreements are generally formed by filing articles of organization. They are controlled either by their members or through management appointed by the members. Limited liabilities companies have gained popularity over the past few decades. The main idea behind the limited liabilities companies was to limit the liability to one or a few members of the LLC.

Tax treatment can be elected either as a partnership or a corporation by the limited liability companies. It can only get a tax exempt status if it has other tax exempt organization as its member. In some states, the limited liability companies can not be used for non profit purposes but they can qualify to do business in these states when formed in another jurisdiction.

5. UNINCORPORATED ASSOCIATIONS – An unincorporated association is recognized as a separate legal entity in many states although it is less formal than a corporation. Unincorporated associations have some of the characteristics of corporations like they can buy, hold, and sell property and can sue or be sued. The Uniform Unincorporated Nonprofit Association Act (UUNAA) is adopted by the states that have recognized unincorporated associations.

A group of people which include neighborhood associations, campaign committees and other associations and groups generally start an unincorporated association which gets together to perform some function. It may have some structure or even officers and members. The association still exists even though the association is not registered with any particular government agency and no formalities of forming a corporation have been followed. It has the advantage of informality but can still qualify for tax-exempt status in many cases.

Options for Structuring a Nonprofit Organization

Other Similarities & Differences between Non Profits & For-Profits are as follows:

Similarities between Non Profits and For Profit Business

• Both non profit as well as for profit organizations have goals and missions which are well defined. Their products or services are known by every one.

• The non profits should satisfy the objectives and needs of their various stakeholders just like a private company knows their customers and serve them accordingly.

• Both non profit and for profit organizations have limited resources and the goals must be met with the limited funds.

• Like private and commercial business corporations, many non profit organizations have boards, management and different levels of staff which help in the efficient working of the organization.

Differences between Non Profits and For Profit Business

• There is third party funding in the case of non profit but not in for profit business. A non profit may get donations, grants and government funds.

• The non profits are generally run by the volunteers but for profit businesses are run by employees who are hired at wages.

• The stakeholders might not contribute financially to the organization unlike the for profit business where the shareholders have to contribute financially.

Similarities & Differences between Non Profits & For-Profits

Although these programs will require you to invest some money and time in getting used to their interface, they are worth giving a try.

The market is inundated with options, when it comes to choosing accounting software. However, we have picked on some of the most popular software programs out there.

QuickBooks:

QuickBooks is our first choice to help you with your nonprofit’s bookkeeping and accounting. We give it the number one ranking based on the following parameters:

Features of QuickBooks

We like QuickBooks for these reasons:

1)      QuickBooks is widely used by smaller nonprofit organizations across U.S.A. This means a lot of thinking goes into keeping it update as per most recent accounting standards as applicable to nonprofit organizations.

2)      QuickBooks offers a standalone version particularly for nonprofit accounting(premier version). This means that you do not have to worry about generating quarterly (payroll and sales taxes reports) and annual reports (like form 990). QuickBooks takes care of it all.

3)      QuickBooks can help your nonprofit organization with quite a few tasks. Amongst others, it can calculate payroll and sales taxes, track your bank balances, prepare financial reports, Write and print checks, Track credit cards and generate a host of custom reports for grant writing.

4)      Given the features it offers, QuickBooks is a relatively cheaper software (USD 500-1000), Check the website for the latest price.

Limitations of QuickBooks

QuickBooks though one of the better options, is not without limitations. Most importantly, QuickBooks isn’t meant for nonprofit organizations with more than five simultaneously online users. So if your organization has managers, accountants, book keepers, board members and office staff with access to the software, no more than five people can use the software simultaneously.

Visit this link to Download a free trial of QuickBooks

Peachtree Accounting

Peachtree Accounting software is our recommended software for larger nonprofit organizations with large operating budgets and evolved accounting needs. Over the last 40 years, since its development, Peachtree Accounting has developed into a robust accounting system for nonprofit organizations.

Features of Peachtree Accounting

• Peachtree is specifically designed for nonprofit organizations. That means all custom reports are just a few clicks away.

• Peachtree Accounting is not just accounting software.  In fact it is rightly called an advanced internal accounting review system which automatically also tracks for erroneous and unusual transactions and marks them for review.

• Peachtree allows for drafting of complicated query based reports allowing for comparisons based on any number of parameters between two accounting periods.

• Peachtree takes care of every accounting need starting from online bank reconciliation system up to preparation of quarterly and annual reports.

• Peachtree is capable of exporting data to Excel Sheet keeping all the underlying formulas intact. If a nonprofit organization started small with QuickBooks and has grown in size, Peachtree Accounts allows easy importing and conversion of previous year data from QuickBooks accounts.

Limitation of Peachtree Accounting

Given the extensive scope of Peachtree Accounting, it may take a while for new users to get accustomed to its user interface. The advanced reports and analysis tools that Peachtree offers may sometimes be unnecessary for smaller organizations.

For a free trial of the accounting software visit Web site:  http://www.peachtree.com

Microsoft Office Accounting

Microsoft Office Accounting comes as the third best option after QuickBooks (for smaller organizations) and PeachTree Accounting (for larger organizations).

Update: Microsoft has discontinued Distribution of Microsoft Office Accounting effective November 16, 2009.However a free ware copy can still be downloaded athttp://www.freewarefiles.com/Microsoft-Office-Accounting-Express-2009_program_24104.html

Features of Microsoft Office Accounting

Microsoft Office Accounting offers the following features:

• Allows for easy journal entries, posting into ledgers and generation of common financial reports
• Provides warning message if you enter an unbalanced transaction
• A separate payroll center that processes payroll, reports payroll liabilities, prints checks, prints reports and file employee payroll taxes
• Process system accounts like accounts receivable, accounts payable, bank charges, and so on
• Generates reports for budgets and produces financial statements
• Has the ability to integrate with Microsoft Excel

Limitations of Microsoft Office Accounting

Microsoft Office Accounting is principally meant for small businesses and is not specifically designed for nonprofit organizations. That means a lot of reports and financial statements have to be manually reworked to suit the specific requirements of nonprofit accounting.

Office Accounting Express is offered as a free download at http://office.microsoft.com.

Best Nonprofit Accounting and Book Keeping Software

With financial scams rocking the world, stakeholders don’t’ just want to know who you are helping.  More than ever, they now want to see proof of how wisely your nonprofit organization is spending its resources. And they want it in black and white.

To keep its head above water, a nonprofit organization is required to apply sound accounting practices into all its activities. Simply put, the books of accounts of the organization should adequately reflect the activities of the organization and should adhere to the acceptable accounting principles.

Nonprofit organizations run on limited resources. Most directors of nonprofits live on the edge, worrying about how they’re going to fund their programs, pay salaries on time and pay other expenses.

Professionally managed books of accounts, takes over a lot of these worries by keeping track of revenues and expenses and providing timely signals. Not to forget, the huge advantage it provides when a nonprofit organization applies for grants or approaches IRS for obtaining tax exempt determination letter or at the time of filing form 990.

Benefits of Nonprofit Accounting

Proper accounting also offers insight into the following important questions:

• Am I making or losing money from my business?
• Is the organization making enough to pay salaries and other bills?
• How much is the organization worth?
• How much is owed to the organization, and how much does it owe?

Nonprofit Accounting: Introduction

This article explains meaning and treatment of ‘restricted net assets’ in the books of non-profit organizations.

Meaning: 

Some donors place restrictions on their contribution. Many donors like to ensure that their contributions are restricted to be used only for specific purposes and/or during a given time frame. The restrictions generally pertain to:

a) Purpose (how/ how not) for which contribution can be used

b) Time (when/when not) after which the contribution can be used.

Some contributions may have both time and purpose restrictions. All such donations create restricted net assets in the books of the organization.

Categories of Restricted Contributions

I) Permanently restricted net assets: Donations in the permanently restricted category are generally meant to provide a permanent source of income for the organization.

Examples of Permanently restricted net assets:

1) Some contributions come with a life long restriction. “Sales of the donated assets are prohibited” is the most common example of ‘permanent restriction’.

2) Donations that can be used only for a certain purpose. For e.g Gifts that require the organization to set up a permanent endowment fund (funds where the principal is to remain intact – expenses are to be borne only out of income from investing the funds) are examples of “restricted contributions”

2)  Temporary restricted net assets: Restrictions which become inapplicable upon completion of certain time or upon happening of certain events are called Temporary restricted net assets. For example, your donor may require you to use the contributions only to support a specific program, or invest it for a specific term, or allow it usage at a designated future time. Term endowments are the most common kind of temporary restricted contribution

3) Unrestricted net contribution: Unrestricted net contribution refer to those net assets which either have no restrictions or those where the restrictions have been met. It has no pre-imposed terms and can be deployed into anything that the organization wants.

Some organizations put self-imposed restrictions on contributions received from certain category of donors. Such contributions are called ‘board-designated contributions’ or ‘designated unrestricted contributions’. All designated unrestricted contributions must be disclosed in the notes to financial statements.

Restricted Assets: Treatment in books 

It is the responsibility of the members of the organization to honor the terms under which a donation has been made.

If a nonprofit organization receives restricted contributions, it should be NOT be classified with cash or other unrestricted assets. Restricted assets must not be mixed with unrestricted asset as it would give a false picture of the financial position of the organization.

Further, all restricted contributions must be reported in the statement of financial position under a separate heading titled ‘restricted assets’. Descriptive information about each restricted contribution must be included as notes to the financial statements.

Restricted Contribution: Treatment in books