Nonprofit Accounting: A Practical Guide for Tax-Exempt Organizations

Nonprofit accounting is the full financial management discipline covering how tax-exempt organizations record, report, and control their money. It sits at the intersection of IRS rules, state nonprofit law, and the oversight authority of the state Attorney General or charity regulator — bodies with different filing requirements, different deadlines, and different enforcement priorities. Getting one right while ignoring another is not a viable strategy.

The accounting foundation for any nonprofit is ASC 958, the FASB standard for nonprofit financial reporting. Under ASC 958, net assets are classified as either restricted or unrestricted — formally, net assets with donor restrictions and net assets without donor restrictions. A donor restriction is either a time restriction (this money can only be used during fiscal year 2026) or a purpose restriction (this grant is only for the organization’s after-school program). Tracking these restrictions accurately is a legal obligation, not just an accounting preference. A nonprofit that spends restricted funds on an unauthorized purpose is exposed to enforcement action by the state charity regulator under the applicable nonprofit corporation law and trust law.

Nonprofit accounting also requires functional expense reporting. The IRS Form 990 asks organizations to allocate all expenses across three functional categories: program services, management and general, and fundraising. These allocations matter for two reasons. First, they determine what gets reported on the face of the Form 990, which is a public document. Second, watchdog groups like the Better Business Bureau’s Wise Giving Alliance and other charity evaluators assess nonprofits partly on what percentage of expenses go toward programs versus overhead. An organization that cannot produce accurate functional allocations has trouble filing an accurate 990 and looks financially opaque to outside evaluators.

Obtaining federal tax-exempt status requires Form 1023 (the full application) or Form 1023-EZ for organizations expecting annual gross receipts of $50,000 or less for the first three years. The IRS evaluates whether the organization meets the requirements of IRC §501(c)(3): organized and operated exclusively for charitable, educational, religious, or other exempt purposes; no private benefit to individuals; no inurement of earnings to insiders; and no substantial lobbying or political campaign activity. The IRS charity resources at irs.gov/charities-non-profits cover these requirements in detail. Once the IRS issues a determination letter, the state-specific filings begin — and they are substantial enough that many organizations underestimate what they are signing up for when they incorporate.

States incorporate nonprofits under their nonprofit corporation laws, which create ongoing obligations beyond the annual tax filings. The board of directors of a nonprofit has specific fiduciary duties under state law — duties of care, loyalty, and obedience to the organization’s mission. The duty of obedience is specific to nonprofits and means the board must ensure the organization operates consistently with its stated charitable purpose. This is not just a governance principle. It is an enforceable legal standard that state regulators have used to pursue board members who allowed charitable assets to be used for improper purposes.

Most state charity regulators require registration from nonprofits operating in or soliciting from the state. The initial registration generally must include a copy of the organization’s IRS determination letter, a copy of its certificate of incorporation or articles of organization, its bylaws, and its most recent financial statements. Annual renewal follows, with different supplemental filings depending on the organization’s revenue. The threshold for when an independent audit is required varies by state, so a nonprofit needs to confirm its own state’s audit threshold and budget for it. State regulators publish detailed guidance and maintain public registries that donors and grantors check.

Revenue recognition rules under nonprofit accounting can trip up organizations that come from a for-profit background. A conditional grant — one where the grantor retains the right to return of funds if specified conditions are not met — is not recognized as revenue until the conditions are substantially met. An unconditional promise to give is recognized when received, even if the cash has not yet been collected. Multi-year pledges are discounted to present value. Getting these classifications right matters for the balance sheet and for the financial information that flows into the Form 990. Organizations that book conditional grants as unconditional revenue overstate their financial position and mislead the board.

Payroll taxes are the same for nonprofits as for any employer. The 501(c)(3) exemption does not cover FICA or federal unemployment. Many states have additional payroll taxes that apply to nonprofits, and organizations are sometimes surprised to learn their state or local payroll taxes apply to them too. Confirm which state and local payroll obligations apply based on where your employees work, and remit on the schedule your state taxing authority requires.

Nonprofit accounting also means understanding how revenue from different sources gets treated differently for reporting purposes. Government grants and contracts are generally treated as exchange transactions or conditional contributions depending on the terms. Foundation grants are typically treated as contributions. Membership dues may be partially exchange income and partially contribution income depending on what benefits members receive. Fee-for-service program revenue is exchange income. These distinctions affect how revenue is classified on the financial statements and how it is reported on Form 990. Misclassifying revenue categories creates 990 errors that can draw IRS scrutiny and produce inaccurate public financial disclosures.

Our firm handles nonprofit accounting for organizations at every stage — from initial registration and bookkeeping system setup through annual 990 preparation, audit coordination, and state compliance. The combination of federal and state requirements is genuinely complex, and organizations that try to manage it with a for-profit accountant who does nonprofit work occasionally tend to accumulate compliance gaps that are expensive to clean up. If you want to understand where your organization stands, start with our new client inquiry page. We will assess your current situation and tell you what needs to be addressed.

Nonprofit accounting requires tracking filings with multiple regulatory bodies — the IRS, your state taxing authority, and your state charity regulator — and each has its own forms, thresholds, and deadlines. Missing any one of them creates problems that can affect the organization’s legal standing, its ability to solicit donations, and its access to grant funding. The complexity is real, and treating any of these filings as optional is a mistake that tends to surface at the worst possible time — during a grant application, an audit, or a regulatory inquiry.

At the federal level, the annual filing obligation depends on the organization’s size. Form 990 is required for nonprofits with gross receipts at or above $200,000 or total assets at or above $500,000. It is a sixteen-page return with multiple schedules covering financial statements, program accomplishments, compensation, governance, and related-party transactions. Form 990-EZ applies to organizations with gross receipts between $50,000 and $200,000 and total assets under $500,000. Form 990-N — the e-Postcard — is for organizations with gross receipts normally at or below $50,000. All three are due on the 15th day of the fifth month after the fiscal year ends: May 15 for calendar-year filers. Form 8868 provides a six-month automatic extension, pushing the deadline to November 15. The extension must be filed by the original due date. Three consecutive years of missed filings triggers automatic revocation of federal tax-exempt status, and the IRS posts revoked organizations on its Auto-Revocation List at irs.gov/charities-non-profits — a list that major grantors and foundation program officers check before approving awards.

The state annual filing requirement for nonprofits is typically a charitable registration renewal filed with the state Attorney General or charity regulator. This is not a tax return — it is a registration renewal that confirms the organization is still operating, still qualified as a charity, and still in compliance with the state’s charitable solicitation rules. The renewal usually must include a copy of the IRS Form 990 (or 990-EZ) for the same period. The thresholds that trigger additional requirements differ by state: at low revenue levels a registration form with no financial supplement may be enough; at mid-range levels a reviewed financial statement is often required; and above a state-specific threshold independently audited financial statements are required. State regulators enforce these requirements, and organizations that submit a renewal without the required attachments receive rejection letters that extend the delinquency period.

State charitable registration deadlines commonly track the Form 990 due date for the same fiscal year — 4.5 months after fiscal year end — with a state extension available in most jurisdictions. Organizations that file Form 8868 for a federal extension should confirm and file a matching state extension, because the state deadline can run independently of whether the IRS grants an extension. Failing to file on time results in a delinquency notice. Persistent delinquency results in suspension of the organization’s right to solicit charitable contributions in the state — which for most nonprofits is an existential problem.

State income tax exemption usually requires a separate application to the state taxing authority. Once the IRS issues a federal 501(c)(3) determination letter, the organization files for state tax exemption; some states grant it automatically for IRC §501(c)(3) organizations, while others run a separate review process. The organization also generally needs to file state annual or biennial reports to maintain its corporate status in good standing under the state’s nonprofit corporation law. Letting that report lapse results in the organization being marked delinquent by the state’s corporate filing office, which can cause complications with bank accounts, contracts, and grant eligibility.

Organizations with employees also file payroll tax returns at the federal and state levels. Federal Form 941 is filed quarterly for income tax withholding and FICA. Federal Form 940 is filed annually for federal unemployment. State quarterly payroll returns go to the state taxing authority. Some states and localities impose additional payroll or transit taxes that affect nonprofits with employees in particular districts, so confirm which apply based on where your staff work and remit accordingly.

Form 990-T is the UBIT return due alongside the Form 990 when the organization has more than $1,000 in gross unrelated business income. Many states conform to the federal UBIT rules and tax unrelated business income at the state corporate rate, typically on a separate state return. Nonprofit accounting that involves significant fee-for-service programs, facility rentals, or commercial activities should include regular UBIT analysis to identify whether those activities generate taxable income and whether the organization is making required estimated tax payments under IRC §6655.

Sales tax treatment varies by state. A 501(c)(3) organization that makes qualifying purchases for exempt purposes can often apply for a sales tax exemption certificate, but some states grant a broad exemption while others grant a narrow one or none at all. Where an exemption exists, it usually requires application, periodic renewal, and presenting the certificate to vendors at the time of purchase. Organizations that do not maintain a current exemption certificate pay sales tax on all purchases, including items that would otherwise be exempt — a recurring, avoidable cost that shows up easily in a compliance review.

Nonprofit accounting at the operating level means maintaining systems that can produce all of these filings accurately, on time, and with supporting documentation. That typically requires accounting software configured for nonprofit fund accounting, a monthly close process, board-level financial reporting, and a CPA who understands the full compliance stack. Our firm handles Form 990 preparation, state registration coordination, registration maintenance, and ongoing bookkeeping for nonprofits. See our corporate and entity tax return services for more on how we approach these returns, or reach out directly via our new client inquiry page to discuss your organization’s specific situation.

Unrelated business income tax is one of the most consistently misunderstood areas of nonprofit accounting. The assumption that a 501(c)(3) exemption covers all income is wrong, and it costs organizations real money in back taxes, interest, and penalties when the IRS examines a return and finds taxable activity that was never reported. The exemption protects income from activities that are substantially related to the organization’s exempt purpose. Income from activities that are not related, that are regularly carried on, and that constitute a trade or business is taxable under IRC §511 through §514 — at the same rates that apply to for-profit corporations.

The three-part UBIT test determines whether any income is subject to tax. The activity must be a trade or business, meaning it involves the provision of goods or services for payment with an intent to generate income. It must be regularly carried on, meaning it happens with a frequency and continuity comparable to commercial operations — not a one-time fundraising event. And it must not be substantially related to the organization’s exempt purpose. The “substantially related” standard requires that the activity itself contribute importantly to accomplishing the exempt purpose, not just that the money earned funds exempt programs. A university that operates a commercial bookstore selling general merchandise to the public is conducting an unrelated business. The fact that the bookstore profits help fund scholarships does not make selling socks and branded merchandise an educational activity.

Nonprofit accounting must identify and track several common UBIT-generating activities. Advertising revenue — income from selling advertising space in a newsletter, on a website, or in a printed program — is taxable under IRC §513. The publication exception does not rescue all publication-related income; income from advertising that promotes a third party’s products is unrelated business income. Income from a parking facility provided to employees and the public was briefly taxable — a provision added in 2017 by the Tax Cuts and Jobs Act under IRC §512(a)(7) that was later repealed in 2019, but which caused significant confusion and required amended returns from many nonprofits that had set up employee parking benefits during the intervening period.

Rental income is an area where the line between UBIT and excluded income is frequently misunderstood. Under IRC §512(b)(3), rental income from real property is generally excluded from UBIT. But if the rental arrangement includes significant personal services (beyond those typically furnished in a commercial rental), the income becomes UBIT. More significantly, if the property was acquired or improved with debt, the debt-financed income rules under IRC §514 bring a portion of the otherwise-excluded rental income back into UBIT territory. The UBIT amount is proportional to the average acquisition indebtedness on the property. Nonprofits that own real estate and rent portions of it to third parties need a careful analysis of whether IRC §514 applies before concluding that the rental income is tax-free.

The federal UBIT return is Form 990-T. Any organization with more than $1,000 in gross unrelated business income must file. The 990-T is due on the same date as the Form 990 — May 15 for calendar-year filers, with a six-month extension available via Form 8868. Organizations that expect to owe more than $500 in UBIT must make quarterly estimated payments under IRC §6655. Missing those estimated payments results in underpayment penalties even if the organization pays the full tax when it files the annual return. Many organizations encounter this obligation for the first time after their revenue crosses a threshold that generates meaningful unrelated income, and the first year’s underpayment penalty is a predictable consequence of not planning ahead.

A significant change from the Tax Cuts and Jobs Act that continues to affect nonprofit accounting is the silo rule under IRC §512(a)(6). Before 2018, a nonprofit with multiple UBIT activities could aggregate them — netting losses from one activity against income from another. Starting with tax years beginning after December 31, 2017, each unrelated business activity must be tracked separately, and losses from one activity can only offset income from that same activity in future years. A nonprofit that operates a profitable catering service for outside events cannot use losses from a money-losing fitness program to reduce its UBIT exposure on the catering income. Each activity is an island. This rule dramatically increased the record-keeping burden for organizations with multiple unrelated business streams, and it increased the overall UBIT liability for many organizations that had previously relied on cross-activity netting.

Many states conform to the federal UBIT framework and tax unrelated business income at the state corporate rate, typically reported on a separate state corporate or unrelated-business return filed with the state taxing authority. State returns often make certain adjustments to the federal taxable income figure but generally follow the federal UBIT computation. Some localities impose their own business income taxes that apply to nonprofits engaged in unrelated business activity within their boundaries — another layer of compliance that organizations with significant local operations need to address.

Exclusions from UBIT offer planning opportunities for well-advised organizations. Dividends, interest, annuities, and royalties are generally excluded under IRC §512(b)(1) — though income from a controlled subsidiary organization can be pulled back in. Capital gains are generally excluded. Activities conducted primarily by volunteers are excluded — this is why a nonprofit’s annual gala or auction typically does not generate UBIT if the event is predominantly staffed by volunteers and not conducted in a manner competitive with commercial event producers. Revenue from the sale of donated merchandise is excluded, which is why most nonprofit thrift stores do not owe UBIT on their sales proceeds. Correctly identifying and documenting these exclusions is as important as identifying taxable UBIT.

Corporate sponsorship payments are a specific area that nonprofit accounting must handle carefully. Under IRC §513(i), a qualified sponsorship payment — where the payer receives no substantial return benefit beyond acknowledgment — is not UBIT. Acknowledgment includes the sponsor’s name, logo, or product display with no qualitative language, no price information, and no comparative advertising. When sponsorship arrangements cross into advertising, the income becomes UBIT. The line is not always obvious in practice, particularly for event programs that include sponsor messages written to sound promotional. Organizations that receive significant event or program sponsorship should have their sponsorship agreements reviewed to confirm they qualify for the exclusion.

The IRS audits Form 990-T filers actively and has identified UBIT compliance as a priority enforcement area. The IRS Tax Exempt and Government Entities division at irs.gov/charities-non-profits publishes its examination priorities annually, and nonprofit accounting that involves material UBIT activity should be handled by a CPA who understands both the federal and state-level rules well enough to defend the treatment on audit. Our firm handles UBIT planning, 990-T preparation, and state-level unrelated business filings for nonprofit clients. See our corporate tax services for more information, or contact us through our new client inquiry page to discuss your organization’s UBIT situation.

State Attorneys General and charity regulators are among the most active enforcers of nonprofit conduct, and nonprofit accounting must be designed with that enforcement reality in mind. These offices have broad authority under state nonprofit corporation law and trust law to investigate charities, compel production of records, seek injunctions, remove board members, and refer matters for criminal prosecution. They have exercised all of these powers in publicized enforcement actions, and understanding what they monitor and require is part of responsible nonprofit financial management.

The starting point is registration. Every charitable organization that operates in a state or solicits charitable contributions from its residents generally must register with that state’s charity regulator before it begins soliciting. The initial registration usually must be submitted with a copy of the federal determination letter, the certificate of incorporation, the bylaws, and financial statements. Organizations that are newly formed and have no financial history submit a projected budget for the first two years. State registries are public — donors can search for any registered charity and see its filing status, financial summaries, and whether it is current or delinquent. Being listed as delinquent is visible to every grantor, foundation, and major donor who looks you up before making a giving decision.

Annual renewal generally must be filed within about 4.5 months after the fiscal year end, with a possible extension. The filing requirements scale with revenue, and the threshold for a mandatory independent audit varies considerably from one state to the next — some states require an audit at a few hundred thousand dollars in revenue, while others set the bar in the millions. That means a nonprofit must confirm its own state’s audit threshold rather than assume a national figure. An independent audit from a CPA firm typically costs between $8,000 and $30,000 depending on organization size and complexity, and the cost goes up when the organization’s books are not in good order before the auditors arrive.

Charity regulators pay specific attention to executive compensation. State nonprofit corporation law commonly requires board approval of executive compensation, and regulators review compensation levels disclosed on the annual filing and the attached Form 990. Compensation that appears excessive relative to the organization’s size, revenue, and the executive’s qualifications triggers scrutiny. The federal excess benefit transaction rules under IRC §4958 set penalties of 25% of the excess benefit amount for a first offense and 200% if the transaction is not corrected — and states have their own enforcement authority independent of the IRS. Organizations that set executive compensation without a documented comparability analysis (reviewing compensation at similar organizations), independent board approval with the executive recused, and board minutes that document the deliberations are taking on avoidable governance risk.

Related-party transactions are another high-priority area. If an organization pays a vendor that is owned by a board member, rents space from a trustee, or enters into a service contract with a firm where the executive director has a financial interest, those transactions must be disclosed on Form 990 Schedule L and must comply with the organization’s conflict of interest policy. Many states require that any transaction between a nonprofit and a related party — including officers, directors, key employees, and their family members and affiliated entities — be approved by the board or a committee with no conflicted members participating. The approval must be documented in board minutes, and the terms must be as favorable to the organization as it would obtain from an unrelated party. Nonprofit accounting must capture these transactions with documentation sufficient to satisfy both the 990 disclosure requirement and a potential regulatory inquiry.

Fundraising compliance is a distinct area of oversight. States generally require registration before soliciting — not before receiving unsolicited gifts. The moment an organization sends fundraising appeals, runs a fundraising campaign, or engages a professional fundraiser to solicit on its behalf, it needs to be registered. Professional fundraisers often must be separately licensed, and contracts between nonprofits and professional fundraisers may need to be filed with the regulator. The financial disclosures required on the annual filing include fundraising expenses and revenue, and organizations that spend an unusually high percentage of donations on fundraising costs draw additional scrutiny. Regulators have brought enforcement actions against organizations where fundraising fees consumed the large majority of donations raised on the organization’s behalf.

Real property tax exemption typically requires a separate application filed with the local assessor. The exemption applies to property owned by the nonprofit and used exclusively for exempt purposes. Mixed-use properties — where part of a building is used for exempt purposes and part is leased to commercial tenants — receive partial exemptions proportional to the exempt use. The exemption must be renewed periodically in most jurisdictions, and organizations that fail to refile lose the exemption for that assessment year. Nonprofit accounting should include a calendar item for the renewal deadline, which varies by municipality.

Sales tax exemption is administered by the state taxing authority where it exists. A qualifying 501(c)(3) organization can often apply for an exempt organization certificate that exempts the organization’s qualifying purchases from state and local sales tax, but the breadth of the exemption varies widely. Where it applies, it requires proper documentation, including presenting the exemption certificate to vendors at the time of purchase. Vendors who accept verbal claims of exemption without documentation are liable for the uncollected tax. Organizations that do not maintain current exemption certificates and present them consistently to vendors pay sales tax unnecessarily on exempt purchases — a meaningful cost on a budget of any size.

Regulatory oversight extends to governance structure in ways that affect how nonprofit accounting must be set up. Many states require nonprofit boards to include independent directors for certain financial oversight functions, and an organization’s audit committee — if it has one — is often required to be comprised entirely of independent directors. The board must annually review the financial statements and, if an audit is required, oversee the audit process and receive the auditor’s report directly. These requirements are commonly enforced through a certification that the organization’s chief financial officer and board chair must sign — certifying, among other things, that the board has fulfilled its oversight obligations for the year. Signing that certification when the board has not actually performed the required oversight is a serious matter. Our bookkeeping services for nonprofit clients are designed to produce the board-ready financial reporting that makes genuine board oversight possible, not just nominal. Reach out through our new client inquiry page to discuss your organization’s situation.

Financial controls are the policies, procedures, and oversight structures that prevent fraud, catch errors, and ensure organizational resources get used for their intended purposes. Nonprofit accounting that lacks adequate financial controls is not just operationally risky — it is a governance failure that state law holds board members responsible for addressing. Charity regulators have pursued board members and executives personally in cases where inadequate controls allowed misappropriation of charitable assets. Understanding what controls are required, recommended, and audited is essential for any organization operating in this regulatory environment.

Segregation of duties is the foundational financial control. No single person should control more than one step of any significant financial transaction. The person who authorizes a payment should not be the person who issues the check or initiates the wire transfer. The person who receives cash or checks should not be the person who records the deposit in the accounting system. The person who reconciles bank accounts should not be the person who has signature authority over the accounts. When one individual controls multiple stages of a transaction, both fraud and error become significantly harder to detect. This is not a comment on any individual’s integrity. It is a structural observation: controls that depend on trustworthiness rather than procedure fail in proportion to how long they are never tested.

Small nonprofits genuinely struggle with segregation of duties because they do not have enough staff to divide every function across different people. The practical solution — and the one that auditors recognize as adequate for small organizations — is to involve board members in financial oversight. A board treasurer who reviews and signs off on bank reconciliations independently of the bookkeeper provides a meaningful control even if the organization has only two or three financial staff members. A board finance committee that reviews monthly financials and asks questions about variances provides oversight that substitutes for the internal segregation that a larger staff would provide. The key is that board involvement is genuine and documented, not a rubber-stamp review of a report no one actually reads.

Monthly bank reconciliation is a control that should be non-negotiable regardless of organization size. Reconciling bank accounts every month identifies unauthorized transactions before the dispute window closes (typically 60 days under banking regulations), catches recording errors before they compound over multiple periods, and keeps the organization’s financial statements current and reliable. The reconciliation should be performed by someone other than the person with check-signing authority, and the completed reconciliation should be reviewed and approved by the board treasurer or finance committee. Organizations that reconcile quarterly or annually — or that delegate the whole process to the bookkeeper with no independent review — have a meaningful control gap that auditors flag in their management letters year after year.

Dual authorization on disbursements above a defined threshold is standard in nonprofit accounting. Most organizations set the dual-signature threshold somewhere between $2,500 and $10,000 depending on their typical disbursement size. All payments above that threshold require approval from two authorized signatories — usually the executive director plus one board officer, or two designated staff members at different levels. Electronic fund transfers and online payments need equivalent controls: two-person authorization requirements for ACH transactions, or separate approval workflows in accounting software that require a second user to authorize before payment is released. Organizations that moved to electronic banking without updating their authorization controls to cover digital transactions have a gap that is worth addressing immediately.

Grant management controls are specific to nonprofit accounting for organizations that receive restricted funding from government agencies, foundations, or individual donors. When money is given for a specific purpose, the organization has a fiduciary obligation to use it for that purpose and to document that it did. This means establishing separate account codes or classes for each restricted grant in the accounting system, running grant-specific budget-versus-actual reports monthly, and reviewing proposed expenditures against the grant budget before committing to them. Pre-approval is required under many government grants for certain types of expenditures or budget modifications — missing those pre-approval requirements can result in disallowed costs that the organization has to repay out of unrestricted funds. Federal awards add the 2 CFR Part 200 Uniform Guidance requirements on top, including a Single Audit once federal expenditures cross $1,000,000 in a year. The accounting controls that make grant compliance manageable need to be built into the system from the beginning, not reconstructed from receipts and credit card statements at audit time.

The state-specific revenue threshold for a mandatory independent audit means that many mid-size nonprofits face an annual audit. The audit is itself a financial control — an independent examination of the financial statements and a test of internal control design and effectiveness. Auditors issue a management letter alongside the audit opinion that documents control weaknesses and recommendations. Taking that letter seriously — addressing the findings, updating policies, and confirming to the auditor in the following year’s engagement that the prior year’s recommendations were implemented — is how organizations build progressively stronger financial infrastructure. Organizations that receive the management letter, file it, and move on without action are signaling to their auditors that governance is nominal.

An expense reimbursement policy is a fundamental control document that many small nonprofits lack. Without a written policy specifying what expenses are reimbursable, what documentation is required, what the approval process is, and what per diem rates apply, expense reimbursements become an informal channel for extracting value from the organization. The IRS requires an accountable plan under IRC §62 for expense reimbursements to be excluded from employee income — the plan must require documentation of business purpose, receipts for expenses above $75, and return of any excess reimbursement within a reasonable time. Organizations without an accountable plan must treat reimbursements as taxable wages, creating payroll tax exposure that compounds retroactively across all the years the policy was absent.

Conflict of interest policy and annual disclosure are required governance controls in most states. Board members and officers should annually complete a disclosure of financial interests, and the board should maintain a written conflict of interest policy that specifies how conflicts are identified, disclosed, managed, and documented. When a conflict of interest is identified regarding a proposed transaction, the conflicted person must disclose, recuse from deliberations and voting, and not be counted toward quorum for that vote. The board’s handling of conflict situations must be documented in meeting minutes. Nonprofit accounting must support this governance process by capturing related-party transactions accurately and ensuring they appear correctly on Form 990 Schedule L.

Cybersecurity controls have become a financial controls issue for nonprofits that process online donations, store donor data, and use cloud-based accounting software. A data breach that exposes donor credit card numbers or personal information creates legal exposure, reputational damage, and potential regulatory action under state data security and breach notification laws, many of which require organizations that hold private information about residents to implement reasonable data security measures. Controls include multi-factor authentication on all financial accounts, restricted access to accounting systems with role-based permissions, encrypted backup of financial records, and a written incident response policy. The cost of implementing these controls is trivial compared to the cost of a breach — both in direct remediation expenses and in donor trust that is extremely difficult to rebuild. Our firm works with nonprofits on the full scope of financial controls, from accounting system setup and bookkeeping through audit preparation and compliance documentation. The new client inquiry page is the best starting point if you want to assess where your organization’s controls stand.