Tax season can be stressful, confusing, and time-consuming. But it doesn’t have to be. Nonprofit taxes will always seem imposing if approached without a plan, and implementing one doesn’t require becoming an accounting expert.
In most cases, a nonprofit’s approach to its tax season can be improved through proper planning, role designation, and further education about tax forms. However, understanding how to plan, assign responsibilities, and recognize appropriate tax forms requires research. To help your team get started, here are five tips to to prepare for tax season:
- Create a Timeline
- Perform a Financial Audit Ahead of Time
- Understand What Forms your Nonprofit Needs to Complete
- Find a Dedicated Bookkeeper
- Hire an Accountant
Most of what good accounting practices come down to is consistent tracking of revenue and expenses. Whether you’re conducting business virtually or on a hybrid model, having an organized system in place to monitor revenue and expenses will prepare your nonprofit with the information it needs to file taxes. However, you might still find that you need help during tax season, so don’t hesitate to reach out to get help from a knowledgeable accounting service.
Without further ado, let’s dive into our first tip for a successful tax season.
1. Create a Timeline
If your nonprofit operates on the calendar fiscal year, your tax forms are due May 15th unless you file for an extension. If you operate on a different fiscal timeframe, your taxes will be due on the 15th day of the 5th month after your fiscal year ends.
That doesn't mean you have five months of relaxation before you need to worry about your accounting needs. When your fiscal year ends, you’ll have several reports to pull, documents to create, and conclusions to draw before moving forward with your finances. From comparing your actual nonprofit budget with the prepared one from last year to pulling your cash flow and financial position statements, your finances team will need adequate time and instruction to prepare necessary documents.
Build a timeline that everyone on your team has access to. While your financial team will handle most tax documents, they will likely need to gather budget reports and other information from different parts of your nonprofit as they get ready to file. If your nonprofit has an all-in-one software solution that everyone can access, put major deadlines on a universal calendar so everyone will be on the same page and accountable for pulling and analyzing the proper documents.
In addition to your tax-filing due date, you may decide to put other activities on your calendar such as drafting a new budget for your board to review, reaching out to contractors for information to issue 1099s, and ensuring everything in your accounting system is correct so that you can pull documents to provide to your accounting team before they start filing paperwork.
How far in advance should your tax filing timeline start? The exact answer will depend on your nonprofit’s size, organization, and current financial status. However, careful revenue allocation and transaction monitoring during your nonprofit’s regular periods of operation will help speed up your exact process by creating easily pullable records to reference.
2. Perform a Financial Audit Ahead of Time
Audits have a bad reputation, but in reality routine auditing will help your nonprofit manage its financial situation by bringing to your attention necessary improvements for effective financial management. If you’re choosing to undergo an audit, try to do so before filing the Form 990. This will give you enough time to adopt and implement any changes instructed by the audit before filing with the IRS.
However, audits do take time. Here’s a breakdown of the typical timeline from beginning to end of the auditing process:
- Select an auditor. The research and selection process can take anywhere from between one to three months. Your audit is for your nonprofit’s benefits, and you should be selective about what you look for in an auditor. Reach out to your contacts for a referral, and take into account each potential auditor’s price model, timeline, and past clients.
- Prepare for the audit. Your auditor should send your nonprofit a list of documents they will need to complete your audit. A few common requested documents are: bank statements, payroll information, grant information, and fundraising details. This process takes between two to four weeks based on your nonprofit’s size and organization.
- Conduct the audit. An audit usually lasts between two to four weeks. However, the exact timeline will likely be hammered out beforehand when you first choose your auditor.
- Incorporate audit suggestions. Your nonprofit should begin updating documents and implementing recommendations immediately after your audit is completed. The exact timeline will depend heavily on the nature of your audit and the size of your nonprofit. However, if tax season is approaching, focus first on finalizing the documents you’ll need to submit by your first deadline.
Putting aside time to incorporate your auditor’s suggestions, the auditing process in total can take between two to five months. Give your nonprofit and auditor plenty of time to finish the process before your taxes are due to limit last minute scrambling.
Or, if you know that you won’t be able to get everything done before your 990 due date, request a six-month extension to your tax due date by filing a Form 8688. Don’t wait until the last minute!
3. Understand What Forms your Nonprofit Needs to Complete
Your tax forms will depend on your nonprofit’s size and business practices. There are four different variants of the Form 990, and your nonprofit will fill out the one that corresponds to your annual revenue. In general, smaller nonprofits will have less to report and, thus, shorter tax forms and the inverse is true for large nonprofits. For instance, nonprofits with annual gross receipts under $50,000 file the 990N, an eight question form that can be filled out online. By contrast, the largest nonprofits earning over $200,000 annually file the 990 Full, which requires reporting your mission, data from financial records, and accomplishments for the year.
However, there are more tax forms than just the Form 990. Take the Form 1099 for example. As Jitasa’s guide to the Form 1099 explains, your nonprofit issues W-2s for employees, but will need to issue Form 1099s for contractors, vendors, and other miscellaneous tax information that doesn’t fall under the category of wages, salaries, or tips.
Determining whether or not you need to issue Form 1099s can get confusing for nonprofit professionals who aren’t intimately familiar with the country’s tax code. Here are the four criteria that indicate your nonprofit will need to issue a Form 1099:
- A payment was made to someone who isn’t your nonprofit’s employee.
- Payments were made in exchange for services for your nonprofit.
- The payment was made to a vendor, individual, partnership, or estate.
- The total payments added up to $600 or more over the course of the year.
If one of these points is not met, you likely don’t need to issue Form 1099s. However, there may still be cases where it’s unclear whether or not a transaction meets the above criteria or qualifies for a different form. In these cases, seek out financial guidance from an experienced nonprofit accountant to make sure no deadlines are missed or mistakes are made.
4. Find a Dedicated Bookkeeper
Bookkeeping responsibilities are often underestimated. While the position doesn’t require formal credentials, the records your bookkeeper manages will be vital to your nonprofit’s budget and tax forms. Many nonprofits lack the funds to hire a full-time bookkeeper and have an executive or trusted volunteer take on the role. This can be done, but your nonprofit should understand what is expected of a bookkeeper before asking someone to take on the position.
Your bookkeeper records financial transactions, pays invoices, and allocates funds. For example, if your nonprofit is marketing a virtual event, your bookkeeper will record promotional costs, pay vendors and other marketing distributors, and determine how much money will be spent on the event as a whole
Remember, your bookkeeper will need to juggle similar responsibilities for every project your nonprofit runs. It may be tempting to have your virtual event team record and manage their own finances. However, dividing bookkeeping tasks can result in a piecemeal approach that can quickly become disorganized and lead to unclean data.
Accudata’s introduction to data hygiene recommends regularly auditing your financial data to check for errors such as inconsistent data entry, duplicated entries, and useless information. The first step to achieving this clean data is to make it very clear who will take on the responsibility of bookkeeping duties. Then, hold them accountable to the task!
Luckily, there is a third option between asking an existing team member or volunteer to record financial transactions. You can outsource your bookkeeping needs to the professionals. By trusting this role to an experienced bookkeeper with years of experience, your books will stay up-to-date and error free.
5. Hire an Accountant
While your nonprofit can implement several internal practices to create a smooth tax season, often nonprofits realize they need additional accounting help to get everything done and ensure it’s all done on time. Your bookkeeper can handle some of your financial responsibilities, but rarely does a bookkeeper have both the time and training to also be your nonprofit’s accountant.
Nonprofit accountants help answer more complex financial questions such as the why behind your finances. For example, your nonprofit may have trouble figuring out how to classify donated items from sponsors at your event or budgeting fundraising expenditures to ensure revenue exceeds costs.
When it comes time for tax season, your accountant will prepare financial documentation and take care of filing necessary forms.
Your accountant can either be in-house or outsourced. In-house accountants will be more specialized and knowledgeable about the specifics of your nonprofit, but many organizations struggle to find the funds to support a full-time accountant on their staff. Outsourcing to an accounting firm can achieve similar results to an in-house accountant, but that professional will be working as a part of a firm that takes care of multiple organizations. This comes with its advantages as these firms have experience across a multitude of organizations and rarely will you encounter an issue that they haven’t seen before.
Few nonprofits look forward to tax season, which is why taking steps ahead of time is all the more important for reducing your workload. Go into tax season with a plan supported by a year of dedicated documentation of your finances. If you do run into trouble or have a question you can’t find the answer to, don’t hesitate to reach out for advice as nonprofit accounting firms are an invaluable and often underutilized resource.