When it comes to your nonprofit, there are different audit approaches to verifying sound financial management practices and operational compliance. The scope of work to review your nonprofit will vary depending on the organization’s classification. There are 29 different types of 501(c) classification statuses for tax exemption; however only one classification is allowed to give donors a tax deduction for contributions. Regardless of which 501(c) classification your organization holds, it is still wise to conduct an independent audit.
Organizations classified as a 501(c)(3) generally require an independent audit annually. An audit will help identify areas that may need additional processes and controls to safeguard against potential fraud and donor information. An independent audit may also help identify missing policies and procedures. For example, if your organization gives museum tickets to donors who contribute $100 or more, then you should check to ensure each contributor is receiving a Disclosure of Quid Pro Quo Contribution.
Disclosures of Quid Pro Quo Contributions are those made in exchange for goods or services. Using the above example:
Example A: Steve donates $100 for a $25 museum ticket. Steve must receive a disclosure informing him that the deductible part of his contribution is $75. Why? Steve’s total contribution is more than $75 and the total payment is more than $75.
Example B: Steve donates $65 for a $25 museum ticket. Steve does not need to receive a disclosures because the total payment of $65 is less than $75 and the contribution portion is less than $75.
Private foundations are also 501(c)(3) organizations, with a few exceptions. Private foundations are generally not churches, schools or colleges, hospitals or medical facilities, college/university endowment funds, government unit or a publicly supported organization.
Private foundations are subject to an excise tax on net investment income. If you run a private foundation, you want to make sure your accounting department has the right procedures and controls in place that capture net investment income and file Form 990-PF.
The 501(c)(4) classification is an organization that promotes social welfare such as civic associations. Local employee associations promoting specific civil rights within a company are part of the social welfare classification, as well. For example, the local mother’s club is may be classified as 501(c)(4) if its purpose is to educate new mothers and provide social activities for new mothers. While social welfare organizations may be small in nature, it would behoove them to keep updated leadership meeting notes and accurate financial records.
Are donations to social welfare organizations tax deductible? Generally donations to 501(c)(4) organizations are not deductible. If donations are ordinary, necessary and aligned with the business, then they may be deductible. Using the mother’s club example, a donation of a bottle of wine from a local winery would not be deductible because the mother’s club is not in the business of selling or making wine. However, a donation of baby supplies may be deductible because the mother’s club promotes social and educational support for new moms.
All 501(c) nonprofit organizations will benefit from having a nonprofit audit. Our team of professional nonprofit auditors will help determine the scope of the work that is relevant to your organization’s specific classification. Our nonprofit audit services will give you peace of mind and help you decide how to best utilize your financial resources in the future. If you have any questions about our nonprofit services, one of our CPAs would be happy to speak with you at (925) 933-2626 or, email us at email@example.com.