Running a nonprofit organization involves many responsibilities, including ensuring that your compensation plan is both fair and compliant with tax regulations. Proper accounting and documentation are crucial to maintain transparency and integrity. This guide will help you create an effective accounting plan for compensation, focusing on key aspects like expenditure amounts, business connection, substantiation, return of excess, and expense tracking.
Importance of an Accounting Plan
Maintaining an accounting plan is essential for remaining compliant with IRS rules and regulations. An accounting plan is essentially how the officers agree to operate the finances of the nonprofit. Many types of expenses can be incurred in operating the nonprofit. For larger nonprofit organizations, it is a good idea to consult with a certified public accountant (CPA) to set up proper accounting strategies to ensure compliance. For smaller nonprofits, accounting plans can be straightforward.
Components of an Accounting Plan
Accounting plans have three basics components:
- Business connection
- Substantiation
- Return of excess
Business Connection
When you incur expenses and seek reimbursement from the nonprofit, the expenses need to have a business connection with the nonprofit. The nonprofit cannot compensate for personal expenses, but it can compensate for expenses that are ordinary and necessary for ongoing business.
Common nonprofit business-related expenses:
– Program expenses
– fundraising
– Salaries and wages for employees and staff
– Rent and utilities
– Office supplies
– Non-local travel expenses
– Professional services
– marketing/advertising
– insurance
Common nonprofit business-related expenses:
– Personal meals (those not directly related to ongoing business with business discussions)
– Personal travel (travel not related to the nonprofit’s mission or activities)
– Personal gifts (gifts that do not serve a legitimate business purpose for the nonprofit)
– Home office expenses
– Personal vehicle expenses not directly related to business travel
– Health and wellness expenses not related to business activities
Substantiation
Substantiation is the proof that expenses are business related, and that they were actually incurred. Substantiation consists of organized and comprehensive documentation covering the who, what, when, where, why, and how in connection with the expense incurred.
Achieving substantiation can be fairly straightforward. You will want to have proof of what you did and how it went. That means receipts for each expense and a personal log of how that expense was business-related. Good organization will help ensure that you are properly documenting the expenses and that the associated log entry is consistent with the expense.
Electronic tracking, such as credit cards, can be useful in keeping tabs on the amount and location of expenses. However, to fully ensure compliance with your accounting plan, you should memorialize all details of the expense in a log.
Return of Excess
Directors, officers, or any other person in the organization who receives money for expenses must return any excess funds. No director, employee, officer, or other person associated with the nonprofit can keep funds from the nonprofit without being duly organized and recognized as an employee of the nonprofit. Any excess funds not returned will complicate the tax return for both the nonprofit and the individual who kept the excess funds.
Conclusion
A well-structured accounting plan for compensation in a small nonprofit organization is essential for maintaining financial integrity and compliance. Implementing proper accounting and documentation practices will help build trust with donors, beneficiaries, and regulatory bodies, ensuring the long-term success of your organization.
By focusing on business connection, substantiation, and the return of excess funds, your nonprofit can maintain transparency and trust with all stakeholders, fostering a strong foundation for future growth and impact.
For nonprofits in Joplin, Missouri, following these guidelines can help ensure that your organization remains compliant with local and federal regulations while effectively managing your financial operations. If your organization needs assistance with setting up an accounting plan, consider consulting an Attorney and CPA experienced in nonprofits to ensure all aspects are covered comprehensively.