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News & Knowledge

The common accounting mistakes many nonprofits make

30th March 2016
Scott Flaherty, Rubino & Company

Like many for-profit organisations, the accounting function for a nonprofit entity is a key component to the continued success of the organization in fulfilling its mission. This periodic review by MSI member firm Rubino & Company will help ensure that you are getting the most out of your accounting function and avoid a wide variety of common accounting mistakes.

Avoiding financial mistakes is critical as these types of mistakes can potentially derail an entire nonprofit’s mission.

The following are some of the more frequent deficiencies related to many nonprofit organisations.

  • Having no off-site data backup. Would your accounting information be safe if a fire, natural disaster, terrorist attack or other emergency took place? Having your data backed up is an essential part of disaster preparedness. Your accounting data should be backed up automatically and frequently. Web-based systems are a convenient solution as your information is backed up and stored off-site.
  • Lacking formal, documented accounting processes. One of the most important ways your exempt organisation can ensure that they have complied with the tax code is through clear accounting. All aspects of managing your nonprofit should be reflected in a detailed, written accounting manual. At a minimum, this should include the procedures for processing payroll, cash receipts and cash disbursements. All individuals that are tasked with any accounting function should be properly trained on all procedures and need to adhere to the procedures closely.
  • Over relying on accounting software. Many nonprofits use sophisticated accounting software, and it can be an effective tool. Nonetheless, mistakes still happen. Always review journal entries and routinely reconcile account balances to ensure that the transactions are complete and accurate. If your accounting system primarily relies on the use of spreadsheets, this step is essential and critical.
  • Failing to report unrelated business income (UBI). The IRS reports that one of the most common errors with nonprofit tax filings is that unrelated business income is not reported accurately. Unrelated business income is income that usually comes from a trade or business transaction that the organisation regularly engages in, but that does not substantially relate to furthering the exempt purpose of the organisation. If you are unsure about whether income would be considered unrelated business income, contact a CPA with nonprofit experience.
  • Wrongly classifying employees as independent contractors. This is another area in which the IRS found that nonprofits often make errors in judgment and practice. The IRS makes an important distinction between a contractor and an employee. You must withhold and pay various payroll taxes on employee earnings, but don’t have the same obligation for independent contractors. Certain criteria must be met for an individual to be treated as an independent contractor. If the IRS can successfully argue that one or more of your independent contractors meet their criteria and should be classified as employees, both you and the contractor possibly face financial consequences including back payroll taxes, interest and penalties.
  • Investing too little in the accounting function. Compared with private industry, nonprofits typically dedicate fewer resource dollars to the accounting function. Therefore, it is important to use the services of an accountant or CPA with experience in the nonprofit sector, whether that person is on staff or external. Not having the right professional handle your accounting and tax issues can lead to many other mistakes.
  • Misplacing original tax exemption documentation. Many organisations lose track of their original documentation over time. Keep all of your original documents and store them in a binder somewhere waterproof and secure. According to IRS Publication 557, you can face significant sanctions for failing to secure these and other key incorporation records.

When you avoid simple accounting errors, you help your nonprofit organisation save time and money, build a stronger relationship of trust with donors, and give managers and board members the information they need to make strategic decisions.

Ultimately, your goal is to carry out the organizational mission. Having sound accounting processes and procedures will help you achieve that goal.

About Rubino & Company, Chartered - Washington DC

Rubino & Company offers comprehensive accounting, tax, and financial services to organizations, individuals, and companies across the Washington, DC metropolitan area.

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