Who’s Counting? Key Differences in Nonprofit vs. Not-For-Profit Accounting and Bookkeeping

One of Certum Solutions’ niches is working with nonprofits — and that includes working with non-for-profit entities. Unless you’ve sat on a charity or church board, been involved in a community fundraiser, or have been employed by these types of organizations, it is probably hard to figure out the differences when it comes to accounting and bookkeeping.

Last month, we covered the differences between nonprofits and for-profits. While we are used to hearing the term “nonprofit organization,” there are some intricacies involved in not-for-profits. Here’s a quick refresher.

Key Differences

While the terms "nonprofit" and "not-for-profit" are often used interchangeably, there are actually significant differences that affect the accounting process. 

Compared with for-profit businesses, nonprofit and not-for-profit organizations share a similarity: Both can apply for a tax-exempt status with the IRS. That means we’re talking about Section 501 of the U.S. tax code. 

However, you don’t need to read the tax code to understand the basics, but there are dozens of types of exempt organizations. The most popular is Section 501(c)(3), which specifically exempts nonprofits from paying tax. According to the Code, these are groups that are “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes.”

The rest of Section 501(c), 501(d) and 401(a) include other types of organizations that may be exempted from the Federal income tax because they aren’t operating to generate revenue—they are not-for-profits.

The most popular “other” 501 organization is the 501(c)(6)—or the not-for-profit organization. The same Code provides for the exemption of business leagues, chambers of commerce, real estate boards, and boards of trade and professional football leagues, which are not organized for profit and no part of the net earnings of which benefit of any private shareholder or individual.” 

I think the differences come down to this: If the group is oriented to charity—in other words, it raises funds through donations and people give out of the goodness of their hearts—that’s a nonprofit organization. If the not-for-profit seems more like a “business” entity, then it’s a not-for-profit.

How This Applies to Your Organization

Chances are, you are probably operating with the correct 501 entity, especially if your organization has been around a long time … think American Red Cross, 100-year-old churches, and even local animal kindness groups.

But when it comes to paying or not paying tax, that’s where you’ll want to ensure you’re doing the right thing. Of course, you have to apply for nonprofit status, but here are three of the most important points:

1.     Nonprofit organizations do not pay tax, but they still must file tax returns with the IRS. According to the IRS, an organization that normally has $50,000 or more in gross receipts and required to file an exempt organization information return must file Form 990, Return of Organization Exempt from Income Tax. If an organization has less than $50,000 in gross receipts, it can file Form 990-EZ, the short form.

2.     If you have employees, payroll taxes must be paid. Whether you’re a nonprofit or a not-for-profit, you must pay and file payroll taxes for every employee. Volunteers don’t count because they do not receive any monetary compensation for their work.

3.     Nonprofits and not-for-profits must be audited. Check out the National Council of Nonprofits’ Audit Guide, where it states “An audit for nonprofit organization involves examining the organization's financial records to make sure they are complying with the requirements of a tax-exempt entity. If the auditor finds that these requirements are not being met, the organization will most likely lose its nonprofit status.” In addition, there are specific state audit law regulations, so check them out as well.

Certum and QuickBooks Can Help

We have set up all of Certum Solutions’ nonprofit and not-for-profit clients on QuickBooks, and can do the same for your organization. While bookkeeping is similar to a for-profit business, the chart of accounts varies—and depending on the type of entity you are, could vary between a nonprofit and not-for-profit.

We would welcome a conversation with you and if appropriate, your board, to explain more about the accounting and bookkeeping process. Contact us today.