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Accounting and tax mistakes - Is your nonprofit making these 6 common slipups ?

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Accounting and tax mistakes
Is your nonprofit making these 6 common slipups?

Your accounting function is key to your organization and should be reviewed regularly. The following six errors are made frequently by many nonprofits. Make sure you address each area.

1.      Lacking formal, documented accounting processes. All aspects of managing your not-for-profit’s money should be reflected in a detailed, written accounting manual. This should include the steps for accepting and depositing donations and paying bills. The person who regularly performs the accounting task should follow these processes to a “T,” and so should anyone who fills in for that employee.

2.      Overrelying on accounting software. Many nonprofits now use accounting software to track their accounts, and it’s an effective tool. Nonetheless, mistakes still happen. Always double-check entries and reconcile your bank accounts to ensure that the transactions your staff has entered are complete and accurate. Even if you use spreadsheets or manual books, this step is essential.

3.      Failing to report unrelated business income (UBI). IRS officials have cited “failing to consider obvious and subtle” UBI tax issues as the top tax mistake nonprofits make. According to the agency, organizations commonly fail to report UBI — or they underreport this income. Follow guidance in IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations. If you need clarification, consult a CPA with nonprofit expertise or the IRS.

4.      Wrongly classifying employees as independent contractors. This is another area in which the IRS says that nonprofits often make errors in judgment and practice. You must withhold and pay various payroll taxes on employee earnings, but don’t have the same obligation for independent contractors. 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.

5.      Investing too little in the accounting function. Compared with private industry, not-for-profits typically dedicate fewer resource dollars to their accounting function. For example, it’s 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 is a problem that can lead to many other mistakes.

Having no off-site data backup. Would your accounting information be safe if a fire, natural disaster, terrorist attack or other emergency took place? Your accounting data should be backed up automatically and frequently. Web-based systems fit the bill because they store the information off-site.

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