Nonprofit organizations are often run similarly to businesses in that they may have employees, directors, clients, revenue and expenses. However, there is one huge exception: These organizations do not earn profit. If you are starting a nonprofit, it’s important to understand your obligations under the law and the key differences between business and not-for-profit accounting.
When you run a for-profit business, all of your sales are revenue. With a nonprofit, however, revenues consist of donations, grants and investments, but may also include membership fees, or fees for services or tickets for events.
In most cases, expenses are the same as they are for a for-profit organization. Rent, utilities, payroll, and related costs are included among the expenses of a nonprofit. Note revenue and expenses in your accounting software, just as you would if you ran a for-profit business.
In many cases, nonprofits embrace different accounting terms than their profit-based peers. While businesses tend to create balance sheets, not-for-profit organizations prefer the statement of financial position. This details the assets and liabilities of the organization as well as its net assets.
Instead of using traditional accounting methods, nonprofits sometimes use fund accounting. Rather than focusing on profits, this type of accounting focuses on accountability. It has stipulations in place to restrict funds and how they are spent. It also helps with transparency issues by organizing the information these organizations need to create reports for their donors.
The government of Canada breaks nonprofits into two groups: registered charities and nonprofit organizations. While neither type operates for profit, registered charities may issue donation receipts to donors so they can claim the charitable tax credit on their tax returns; NPOs do not have that privilege.
As a result, registered charities must go through a registration process with the Canada Revenue Agency. NPOs may have to register for nonprofit status in their own provinces, but they do not need to go through a special registration process with the CRA.
Both registered charities and NPOs must file returns with the CRA, and the returns are due six months after the end of the fiscal year. For example, if you run an NPO with a calendar fiscal year, your returns are due June 1.
Registered charities file Form T3010 (Registered Charity Information Return), while NPOs file Form 1044 (NPO Information Return). However, if your NPO is incorporated, you must file a T2 (Corporation Income Tax Return).
Registered charities do not ever have to pay income tax, but NPOs may have to pay income tax on property income or capital gains. Both types of organizations must pay sales tax; registered charities may be able to claim a rebate of goods and services tax and harmonized sales tax on some purchases, while NPOs may only claim a rebate if they received government funding for the purchase.