Non-profit organizations typically have a mandate to serve the public good, and as such, they are exempt from paying taxes. There is, however, a caveat. These organizations must continuously meet set eligibility criteria to maintain their financial and tax-exempt status. The reality is so many non-profit organizations risk losing their status by making very common yet avoidable mistakes. The truth is you don’t have to lose your non-profit status if you follow a few simple principles. In this blog, we’ll look at four principles to help non-profit organizations avoid losing their eligibility.
First, every non-profit organization in the United States is required to complete an annual filing requirement, both at the state and federal levels. In addition, the IRS Form 990 is used by the Internal Revenue Service to assess the financial accountability and transparency of non-profit organizations. In order to maintain a valid non-profit status, it is essential to complete all necessary annual filings on time. Failure to do so can lead to revocation of your non-profit status, eventually leading to tax penalties or liabilities.
Second, it’s essential to hire a professional accountant to ensure that your organization is audit compliant. An audit evaluates the financial records of an organization to assess and identify any issues or discrepancies. A professional accountant will help your non-profit organization conform to IRS regulations by anticipating and resolving potential issues before they come up. It’s imperative to choose a qualified accounting firm that can assist you with technical tax law issues so that you can be sure of the legality of your non-profit organization.
Third, developing financial statements is another crucial factor in maintaining non-profit status. These statements detail the financial transactions of the non-profit organization, and they offer a clear view of how the organization operates and survives. Financial statements include:
- A balance sheet
- An income statement
- A statement of cash flow
- A detailed document of transactions
These financial statements can be helpful in tracking patterns or financial inconsistencies that may arise.
Finally, it’s important that non-profit organizations maintain focus and stay faithful to their mission. A non-profit organization’s mission is the reason why it exists. It defines and directs the organization’s goals and actions. Consistently veering off-course and operating in areas/specifications outside its defined framework can cost a non-profit organization its status. Let’s say, for example, a non-profit organization focuses on feeding and providing shelter to homeless people. The organization should stick to this primary goal only, avoiding distractions and mission creep or losing focus completely.
Maintaining a non-profit status is achievable if you adhere to the set criteria. Completing annual state and federal filings, hiring a professional accountant, developing financial statements, and always staying faithful to your mission are all principles that may seem straightforward but are crucial for sustaining non-profit status. A failure to follow these principles can have dire consequences, such as losing the non-profit status, financially crippling penalties, and liabilities that could undermine the organization’s mission.
JoAnna Laiscell, September 26, 2023
