Tax-Exempt Organization

A tax-exempt organization, also known as a nonprofit organization, is a legal entity that is exempt from paying federal income tax. This status is typically granted to organizations that operate for religious, charitable, educational, scientific, or other purposes that benefit the public. Contributions made to the organization by individuals and corporations are often tax-deductible for the donor, provided that the organization meets certain requirements and the donor follows IRS rules. While tax-exempt at the federal level, these organizations may still be subject to state and local taxes, such as sales and property taxes, depending on state laws and the nature of the organization. The most common type of tax-exempt organization in the United States is a 501(c)(3) organization, named after the section of the Internal Revenue Code that provides for its tax-exempt status.

Bookkeeping

Revenue

  • • Federated campaigns

    • Membership dues and assessments

    • Fundraising events

    • Related organizations

    • Government grants

    • Other contributions, gifts, grants, etc.

  • • Tax-exempt interest (in-state bonds)

    • Federal tax-exempt interest (out-of-state bonds)

    • State tax-exempt interest (US bonds, T-bills, etc.)

  • • Investment from tax-exempt bond proceeds

    • Royalties

    • Net income (loss) from gaming

    • Fees and contracts from government agencies

    • Membership dues and assessments

    • Interest on savings & cash investments

    • Dividends/interest from securities

    • RRE income (loss)-debt-financed

    • RRE income (loss)-debt-not-financed

    • Rental income (loss)-personal property

    • Other investment income

    • Gain (loss) from asset sales-non inventory.

    • Net income (loss) from fundraising events

    • Gross profit (loss) from inventory sales

Organization Expenses

  • • Grants & other assistance to gov. & orgs. in U.S.

    • Grants & other assistance to individuals in U.S.

    • Grants & other assistance to gov., orgs. & individuals outside U.S.

    • Benefits paid to/for members

    • Compensation of officers, etc.

    • Compensation of disqualified persons

    • Other salaries and wages

    • Pension plan contributions

    • Other employee benefits

    • Payroll taxes

    • Advertising and promotion

    • Office expenses

    • Information technology

    • Royalties

    • Occupancy

    • Travel

    • Travel and entertainment for public officials

    • Conferences, conventions, etc

    • Interest

    • Payments to affiliates [Override]

    • Book depreciation [Override]

    • Book amortization [Override]

    • Depletion, etc.

    • Insurance

    • Postage and shipping

    • Printing and publications

  • • Compensation of officers, etc.

    • Other salaries and wages

    • Pension plan contributions

    • Legal fees

    • Accounting fees

    • Professional fees

    • Interest

    • Taxes

    • Occupancy

    • Travel, conferences, etc.

    • Printing and publications

    • Rental expenses

    • Public event

    • Cont, gifts, grants paid

  • • Electric Charging Fees

    • Garage and Parking Space

    • Gas and Fuel

    • Insurance

    • Lease Payments

    • License and Registration

    • Loan Interests

    • Mileage

    • Parking and Tolls

    • Property Tax

    • Repairs and Maintenance

    • Tires

    • Washing and Detailing

  • If you financed or have a car loan for the vehicle, the IRS considers that you own it for vehicle expense purposes. The original cost or cost basis of the vehicle can be “depreciated”.

    2023 Depreciation Rules:

    1. Vehicles below 6,000 lbs: Deduct up to $12,200 on first year or up to $20,200 with bonus depreciation. $19,500 in the second year; $11,700 in the third year; and $6,960 in subsequent years.

    2. Vehicles over 6,000 lbs: Deduct up to $28,900 on first year. $19,500 in the second year; $11,700 in the third year; and $6,960 in subsequent years.

  • • Aggregate joint costs

    • Program services allocation

    • Management and general allocation

    • Fundraising allocation

  • • Management

    • Legal

    • Accounting

    • Lobbying

    • Professional fundraising

    • Investment management

Home Office Expenses

  • The ratio will determine the deductible portion of your home office. So we’ll need these 2 items:

    • Square Feet of Area Used for Business

    • Total Square Feet of Home

    For example, if your home office is 200 square feet and your total home is 2,000 square feet, you can deduct 10% (200 ÷ 2,000) of home expenses.

  • In order to deduct your rent, one of the following must apply:

    • You use part of your home exclusively and regularly as your principal place of business, as a place to meet or deal with patients, clients or customers in the normal course of your business, or in connection with your trade or business where there is a separate structure not attached to the home.

    • You use part of your home on a regular basis for certain storage use such as inventory or product samples, as rental property, or as a home daycare facility.

  • If you are a homeowner and use a portion of your home exclusively and regularly for your business, you can deduct a portion of your mortgage interest as a business expense. Form 1098 may be used to calculate the deduction.

  • If the household expenses and repairs benefit the office space, they are deductible. Expenses such as painting your home or fixing the roof of your home are deductible.

  • Real estate taxes can also be deducted as part of the home office deduction, provided you use part of your home exclusively and regularly for business purposes. You can deduct a portion of your real estate taxes based on the percentage of your home's total square footage used for business.

  • Renter’s insurance is deductible as part of the home office deduction, provided you use part of your home exclusively and regularly for business purposes. If you meet the criteria for the home office deduction, you can deduct a portion of your renter’s insurance as a business expense.

  • Homeowner's insurance is deductible as part of the home office deduction, provided you use part of your home exclusively and regularly for business purposes. If you meet the criteria for the home office deduction, you can deduct a portion of your homeowner's insurance premiums as a business expense.

  • If you had a casualty or theft, like from a hurricane, tornado, fire, theft or vandalism that affected your home office, you can claim a business deduction for that loss. Casualty losses can be direct or indirect.

    Direct casualty losses are casualty losses that only affect your home office.

    Indirect casualty losses will be multiplied by your business use percentage. For example, a storm damages your roof. Since the roof is part of the whole house and used for both business and personal purposes, this is an indirect expense.

  • • Electricity Bill

    • Gas, Sewage, and Water Bill

    • Internet and Phone Bill

Gross Profit From Sales of Inventory

In some cases, if your nonprofit has made money from unrelated business, the inventory production, purchase, or sale of merchandise, must be taken into account at the beginning and end of the tax year.

  • The value of inventory at the beginning of the tax year.

    Inventory should include the following:

    • Merchandise or stock in trade

    • Raw materials

    • Work in process

    • Finished products

    • Supplies that physically become a part of the item intended for sale

    • Also, the following merchandise should be included in inventory:

    • Purchased merchandise if title has passed to you even if the merchandise is in transit to you or you do not have physical possession of it for another reason

    • Goods under contract for sale that you have not yet segregated and applied to the contract

    • Goods out on consignment

    • Goods held for sale in display rooms, merchandise mart rooms, or booths located away from your place of business

  • Items bought for resale or that become part of the goods you produce for sale.

    • Raw Materials and Supplies: Costs for materials and supplies that are used in the production of goods for sale.

    • Products for Resale: Expenses for purchasing goods that are intended to be resold to customers, typically in the same condition in which they were bought.

    • Freight-in Costs: Shipping and handling costs associated with getting the items to your place of business.

  • Manufacturing labor costs include the wages and salaries paid to employees who are directly involved in producing the goods. This can include workers on the production line, machine operators, and other direct labor employees. It's important to note that these costs should only include the direct labor involved in making the products, not the labor costs for administrative or sales staff.

  • These costs are considered part of your business expenses and can be deducted in the year they are used or consumed.

    • Raw Materials: The basic materials from which your products are made. For a manufacturing or production business, this could be things like wood, metal, fabric, or ingredients.

    • Supplies: Items that are used in the production process but are not directly part of the final product. This might include things like adhesives, cleaning supplies, or small tools.

    • Consumables: Items that are used up quickly, such as paper, printer ink, or office supplies.

  • Additional expenses that are directly associated with the production or acquisition of the goods you sell, but which do not fit neatly into the categories of "Purchases," "Labor Costs," or "Materials and Supplies." These can include:

    • Factory Overhead: Costs related to manufacturing that are not directly tied to a specific product, such as utilities for the manufacturing facility, depreciation on equipment, and rent for the production space.

    • Indirect Labor: Wages for employees who contribute to the production process but are not directly involved in making the products, such as quality control inspectors, supervisors, and maintenance staff.

    • Packaging Costs: The costs of packaging materials for your products.

    • Freight-in: Shipping costs for bringing materials or inventory to your place of business.

    • Other Manufacturing Expenses: Various other costs directly related to the production process, such as costs for molds, dies, or tooling used in manufacturing.

  • The value of inventory (unsold and on hand) at the end of the tax year.

    The ending inventory typically includes:

    • Finished Goods: Completed products that are ready for sale but have not yet been sold.

    • Work-in-Progress (WIP): Goods that are in the process of being manufactured but are not yet completed.

    • Raw Materials: The basic materials and supplies that are on hand and will be used to produce goods.

Depreciation and Amortization

Depreciation and amortization are accounting methods used to allocate the cost of tangible and intangible assets over their useful lives, respectively.

  • A depreciable asset a property that a business owns and uses for its operations, which has a useful life of more than one year and loses value (depreciates) over time due to wear, tear, and obsolescence. These assets are used in the business and are not intended for resale in the course of business. The cost of depreciable assets cannot be fully deducted in the year of purchase; instead, the cost is spread out (depreciated) over the asset's useful life. Common examples of depreciable assets for businesses include:

    1. Buildings: If a business owns the building in which it operates, the cost of the building (not the land) can be depreciated.

    2. Vehicles: Cars, trucks, or vans used for business purposes.

    3. Machinery and Equipment: Items such as computers, office equipment, manufacturing machinery, or tools used in the business.

    4. Furniture and Fixtures: Desks, chairs, shelves, and other office furnishings.

    5. Leasehold Improvements: Improvements made to a leased property, such as adding partitions, painting, or installing new flooring.

  • Amortization is a financial term used to describe the process of gradually reducing the cost or value of an asset or the balance of a loan over a period of time. It involves making regular payments that cover both the interest and a portion of the principal amount of a loan. The concept of amortization is commonly used in the context of loans (like mortgages) and intangible assets. There are two main types:

    1. Amortization of a Loan: This refers to the process of paying off a debt over time through regular payments. A portion of each payment goes towards the interest, while the remainder is used to reduce the principal balance. Over time, the interest portion decreases and the principal portion increases, eventually paying off the loan in full. An example of this is a mortgage loan, where the borrower makes monthly payments that are calculated to pay off the loan over a specific period, such as 30 years.

    2. Amortization of an Intangible Asset: This involves gradually writing off the cost of an intangible asset (such as patents, copyrights, trademarks, or goodwill) over its useful life. Instead of expensing the entire cost of the asset in the year it is acquired, it is spread out over several years, reflecting the asset's consumption, use, or decline in value. For example, if a company acquires a patent that is expected to be useful for 10 years, the company will amortize the cost of the patent over those 10 years, affecting their financial statements accordingly.