top of page

Not-for-Profit Formation, Accounting, and Income Taxes

We prepare the Form 1023 series of Forms to set up the 501 (c)
Organization. We also file Form 990 and arrange for the audit
process as needed.


We are familiar with the accepted accounting principles for not-for-profit
organizations. There are, however, some significant differences which include:

  • Accounting for Contributions

  • Capitalizing and Depreciating Assets

  • Use of Cash - and Modified Cash-Basis Accounting

  • Functional Expense Classification

We Find Tax Savings For Nonprofit Organizations


Accounting for Contributions
Nonprofits that qualify for tax-exempt status under section 501(c)(3) of the
Internal Revenue Code are entitled to receive contributions that are tax-
deductible to the donor. Since this is unique to the nonprofit sector, there are
no equivalent procedures for handling contributions in for-profit accounting.
Special procedures have been established for managing the following types of

Donated Materials and Services
(In-Kind Contributions) Guidelines require that nonprofits account for
contributions of most goods (except for works of art and other items held in

museum collections). In addition, volunteer time must be included in the
financial statements when either:


The volunteer time results in the creation or enhancement of non-
financial assets, such as volunteer labor to renovate a child care center; or
The services volunteered are specialized skills, such as those provided
by accountants, nurses, electricians, teachers, or other professionals and

Special Events and Membership Dues

People who pay to attend fundraisers (such as dinners, auctions, fashion
shows, bake sales, etc.) often receive a tangible benefit in return (a meal, a
performance, etc.)  Similarly, membership dues may entitle individuals to use facilities, receive services, etc. The portion of the special event charge or
membership dues which represents the reasonable value of the benefit
received is not tax-deductible to the donor. Some minimal benefits are
excluded from this rule.

In addition, the accounting profession has established guidelines for
responsibly tracking monies that have been restricted by the donor for specific use (e.g., buying a new building, starting a new program, adding to the endowment, etc.)  How these monies are tracked and reported depends on the nature of the donor & restriction, what conditions, if any, the donor has imposed on the organization before it can receive or use the money, when the restrictions are met, etc.

Charity Drive

Capitalizing and Depreciating Assets

Modern Building

As in for-profit accounting, nonprofits are required to record the purchase of
long-lasting, substantial property and equipment (such as computers, vans,
buildings, etc.) as assets in the financial records, and to charge a portion of
the cost of those items in each year in which they have a useful life. This
process is called capitalizing and depreciating fixed assets. While all
businesses, including nonprofits, are required to record the depreciation of
assets, some assets in the nonprofit sector receive special treatment. These
include museum collections, historical buildings, library books, zoo animals,

Donated items that are added to collections that are held for public exhibition,
protected, and kept unencumbered, and subject to the policy that, if sold, the
proceeds are used to acquire equivalent replacements for the collection, do
not have to be recorded as revenue and are not recognized as formal assets
in the financial statements

Use of Cash-and Modified Cash-Basis Accounting

Many small nonprofits use cash-basis rather than accrual-basis accounting to record expenses and revenues. This means that they only record revenue when the cash is received, and only record expenses when they are paid. Some nonprofits use a modified-cash basis of accounting. They will record payroll taxes withheld from employees or large revenue or expense items on an accrual basis. This means recording revenues when they are earned and expenses when obligations are incurred. Most businesses track all expenses and revenues using accrual accounting.

Food Delivery

Functional Expense Allocation

Tax Income Reports

Nonprofits are required to report their expenses by what is known as their functional expense classifications. The two primary functional expense classifications are program services and supporting activities. Supporting activities typically include management and general activities, fundraising, and membership development. Practices vary widely from organization to organization in the nonprofit sector as to how expenses are categorized by functional areas.

Determining Not-For-Profit success

To determine a nonprofit's success, you must also refer to its goals: these are the group's self-determined replacement for the bottom line of profit-making. The board can measure (a nonprofit's) success by comparing the results achieved with the results sought. This points to the importance of a clear mission statement as well as regularly updated short and long-term goals that reflect the purpose of a volunteer agency. It also underscores the need to include service statistics in conjunction with financial statements. In this way, board members can begin to grapple with the complex issues of efficiency and effectiveness as their organization pursues its stated goals.

Helping Hands
bottom of page