Nonprofit organizations may not have to pay income taxes to the IRS, but they still have to file annual forms and returns, and in many cases they have to recognize and categorize their financial activities to meet specific state and federal requirements. Using professional tax and accounting services will ensure that Arizona organizations can maintain their tax exempt status and also apply for nonprofit designation.
Apply for tax exempt status
When an organization applies for tax exempt status, the most difficult hurdle to overcome is gathering the necessary documentation required by the IRS. In addition to specific items related to the formation leadership and purpose of the organization, there are financial statements needed such as:
- Inventory of assets
- Inventory of liabilities
- Rent & lease agreements and contracts
- Revenue and expense statements at least 4 years back or as far back as possible.
- Additional financial support documentation such as all sources of revenue such as donations, and fundraising events
Financial record keeping during the year
Once a company has received tax exempt status, then it has to setup an accounting system that is built around specific IRS revenue and expense classifications. This is critical to ensure that the nonprofit designation will be retained each year.
- Functional expense categories – nonprofits need to report their activities across specific program related categories such as operations, fundraising and program services.
- Recording revenue – since the bulk of income is generated from charitable donations and fundraising events, these need to be recorded and tracked very specifically.
- Donor database – in particular, donor information needs to be maintained so that letters can be sent out to acknowledge receipt of contributions. At the end of the year, statements from tax exempt organizations are issued to donors to be used to support their own personal tax filing statements.
Tax 990 Forms
Even though no taxes will most likely be paid, there are very detailed forms that must be filed each year to the IRS. The Tax 990 form is essentially a statement of information and financial activities that support the tax exempt status of the organization. Failure to file the form will result in removal of nonprofit status and tax penalties assessed.
If all of this information has your head spinning, then clearly you can see how a professional tax and accounting service would be critical for any Arizona nonprofit. Contact us today for assistance.