A nonprofit business operates under slightly different tax laws and accounting methods than businesses that operate to make money. Some differences concern the way the nonprofit is set up and what it can do with its funds. Other differences depend on people who donate money to the nonprofit. If you own or work for a nonprofit and are worried about accounting, keep the basics in mind and be careful what you use your funds for.
What are Restricted Funds?
Restricted funds are restricted, not by government law, but by the person who donates them. Restricted funds are designed to be used for a specific purpose, and must be accounted for accordingly. You cannot put them in a general fund and use them for any projects. If you do not provide documentation that you used the funds for the purpose for which they were donated, the donor may repeal his grant. Do not borrow against restricted funds, since this puts them in jeopardy.
Are There Federal Spending Requirements for Nonprofits Too?
The answer depends on what kind of nonprofit organization you are. If you are a private foundation, then you must spend a certain amount of money per year on charities and grants. The required amount is 5 percent of the fair market value of the total investment assets of the foundation for the previous year, so this requires accurate bookkeeping on all fronts. Public charities do not need to worry about spending requirements.
Can Nonprofits Make a Profit?
Nonprofits can generate funds, although they cannot use these funds to pay board members or owners. Most nonprofits need to create funds to cover their annual expenses anyway. There are also legal loopholes that allow nonprofit businesses to create a for-profit sector within their organization if they want to pursue a particular venture.
Can Nonprofits Sell Donated Items to Raise Money?
This depends largely on the donor and can vary. If the donor donates an item specifically for your use, then that donor can deduct full fair market value for the item on her taxes. This also means that you need to use the item for your business, not turn around and sell it. If donors donate items that are "unrelated" to the nonprofit, then you can sell them and use the proceeds (the donor receives a lesser tax benefit in return).