Budgeting and Form 990: Ins and Outs of Nonprofit Accounting
Nonprofit accounting has a reputation for being time-consuming, complex, and sometimes inscrutable. However, accounting activities are an ongoing necessity for functioning nonprofits.
Creating and balancing your nonprofit’s budget, building financial plans, and managing other accounting documents requires at least a basic understanding of your organization’s finances. This helps you understand what your team can accomplish on its own and what you might need help with.
While there are lots of forms and financial documents out there that you’ll likely run into, there are two primary financial tools that are critical to your financial strategy: your budget and tax forms. This article will provide an overview of the ins and outs of those two key aspects of nonprofit accounting:
After defining each of these key terms, we’ll explore a few best practices regarding how to prepare, manage, and follow-through with these necessary accounting responsibilities. While it can be incredibly tempting to file forms and plan finances on your own, many organizations find that they’re most comfortable working with an expert to ensure quality and effective planning.
How to Create a Nonprofit Budget
What is a Nonprofit Budget?
A nonprofit budget is a plan for a set period (weekly, monthly, quarterly, or annual) based on the predicted costs and revenues your nonprofit expects to incur. Your budget should be treated as a living document that may be adjusted as your revenues and expenses deviate from your initial predictions.
Your nonprofit’s budget can further be divided into two primary budgets:
- Operating Budget: Nonprofits have specific rules on how they can spend their annual budget. Different funds can only be spent on specific causes, so your operating budget helps your nonprofit divide its costs and revenue by funding source, program costs, and overhead.
- Capital Budgets Project: Your capital budgets project incorporates your long-term financial plan. This budget accounts for multi-year expenses such as capital campaigns, building projects, and other long-term initiatives.
Effectively forecasting your budget requires insight into your nonprofit’s financial history, current trends in nonprofit giving, and future organizational plans and activities. Making accurate budget projections will become easier as your nonprofit has a longer financial history to study.
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Best Practices for Creating a Nonprofit Budget
Your budget shouldn’t just be a record of your spending and earning but a usable document that helps inform your nonprofit’s financial direction. Nonprofits, by definition, reinvest any earned profits back into their mission, and holding your budget accountable to specific, measurable goals can help your organization make the most of how it earns, spends, and invests its resources to fulfill your cause.
You can make better decisions about your nonprofit’s budget by first understanding the roles and responsibilities of nonprofit bookkeepers and accountants and how those roles relate to budgetary creation. Jitasa’s guide to nonprofit bookkeepers and accountants breaks down the difference:
- Enter basic data: Nonprofit bookkeepers record donations, spending, and other financial transactions in your nonprofit’s financial software.
- Allocate costs: Your nonprofit needs to understand its different expenses to report what percentage of your budget was spent on your mission, fundraising, or overhead to give a few examples. Bookkeepers organize expenses by allocating and determining spending for every part of your nonprofit.
- Write checks and make deposits: Nonprofit bookkeepers make deposits and payments, then record the transactions in your nonprofit’s financial software.
- Can be an executive or trained volunteer: Bookkeepers don’t need certification or a degree to complete their work (although it doesn’t hurt!). Many nonprofits ask an executive or trusted volunteer to handle bookkeeping responsibilities as they won’t need to conduct any complicated financial analysis.
- Review and reconcile accounts: Nonprofit accountants compare your financial records to the cash in your bank account to catch and account for any discrepancies.
- Prepare detailed reports: As part of their financial analysis, accountants prepare reports on your nonprofit’s monthly transactions to assess current financial health and make future spending decisions.
- Compare actual and predicted expenses: Nonprofit accounts help your nonprofit make more accurate predictions for future spending years by analyzing your previous budgets and actual spending and revenue.
- Have an accounting degree and are certified: Nonprofit accountants understand the why behind the numbers in your books and ask questions to improve your nonprofit’s financial health and compliance. Nonprofit accounts have received the proper training to know what to look for and what questions to ask by earning a four-year degree and passing specialized tests that grant them certification.
So how do these two roles impact your budget?
Essentially, your nonprofit bookkeeper will be the one recording and keeping up with all of the financial data that is necessary to create the budget and check in at various points during the year to make sure you’re on track. Meanwhile, your accountant is the one who compares the actual versus predicted budget and helps make adjustments from that information.
Your nonprofit will need both a bookkeeper and an accountant to create and manage your annual budget effectively. Be sure to clearly define their roles with them so that you know exactly who is responsible for what financial activities.
Filing Your Form 990
What is the Form 990?
To remain compliant with the IRS, tax-exempt organizations fill out the annual Form 990 at the end of each year. This document allows the IRS to determine if your nonprofit is legitimate and should continue deserving its tax-exempt status. Form 990 is considered a public document, allowing anyone to view your financial data. While this might be intimidating, it actually creates an additional level of transparency with your supporters, which they likely appreciate.
There are different variants of the Form 990 for your nonprofit to fill out based on its size. For example, small organizations earning less than $50,000 would fill out the Form 990-N, while the next level up is the 990-EZ, and finally, the standard Form 990. Your state will also have specific requirements for what forms to file, so be sure to check out your local requirements in advance.
Best Practices For Filing Form 990
The most important aspects to remember as you file your Form 990 are filing correctly and filing on time.
Because these files are a part of the public record, adding additional unnecessary information is liable to put your organization at unnecessary risk. From 2001 to 2006, 132,000 charities included at least one social security number on their public Form 990. This leaves that information available to the public eye as the form is reported.
Filing correctly and having a certified nonprofit accountant look over your Form 990 before it’s submitted is the best way to make sure these types of slip-ups don’t occur.
Especially if you’re asking for help when filing your annual tax forms, make sure you give the accountant plenty of time before the deadline. The last thing you want is to file a late form because there are penalties associated with missing the deadline. If you file late (or forget to file), you may experience penalties such as:
- Loss of your tax-exempt status
- Loss of your ability to accept tax-deductible contributions
- Fees that range from $20 to $100 per day
- Loss of donor trust and confidence
If you’re planning a financial audit for your organization, you should try to complete it before filing your Form 990. That’s because you’ll want to incorporate the updated financial information resulting from the audit on the annual tax form.
Prepare for your audit by reaching out to your contacts to find an auditing firm, then come up with a list of questions to ask ahead of time regarding timelines and payment. Once you’ve chosen a firm, gather documents you’ll need such as bank statements, your fiscal year’s ledger, and a record of financial management policies, among others. Assist your auditor as they move through the process and follow-up by incorporating any suggested changes and record the changes in your financial process documents for when you file the Form 990.
This may sound like a lot. If you’re unsure how you’ll get it all done before your tax deadline, you can always file for an extension with the IRS through a Form 8688. We know this is a lot of form talk, but the good thing is that a nonprofit accountant can help walk you through everything.
If you choose to hire a nonprofit accountant or consultant firm to file your taxes, find an auditor, and potentially ask for a tax deadline extension, consider their:
- Price model: Look for an accountant with a flat-rate pricing model. Additional fees can quickly add up, and sometimes hidden costs can result in severe overpayments.
- Past work experience: Your accountant should have experience working with similar organizations, both in their size and the kind of work they do. Experienced accounting firms can be an invaluable source of knowledge, whereas inexperienced ones may require you to spend excessive time teaching them about your field.
- Recommendations: Reach out to other organizations to get advice from a trusted source about potential accounting firms. A good accounting firm can save your nonprofit time, but a bad one can lead to serious mistakes and lapsed deadlines.
The right accountant will save your nonprofit time, file your Form 990 without mistake, and provide the kinds of financial insight that only come with years of experience working in nonprofit accounting.
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Nonprofit accounting gets easier over time and with the right help. Instead of feeling like an obligation, your budget and routine audits should help your nonprofit reach specific goals while maintaining transparency.
Construct your budget based on what you know about your nonprofit and the concrete data you pull during fundraising and programming activities and keep track of your finances to avoid reconciling any last-minute discrepancies when filing your Form 990. Don’t be afraid to ask for help, either! When you have a dedicated financial professional on your side, you can take some of this off of your plate and focus on what drives you: your mission.
About the Author:
Jon Osterburg, VP of Sales & Marketing at Jitasa
Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa, an accounting firm that offers bookkeeping and accounting services to not-for-profit organizations.