Compliance Matters: Navigate Nonprofit Financial Regulations 

What This Is: Your nonprofit’s team likely focuses on the day-to-day tasks involved with accepting donations, building supporter relationships, developing beneficiary programming, and keeping your mission alive. 

What This Means: You can’t let behind-the-scenes responsibilities like compliance fall by the wayside. Compliance with nonprofit rules and regulations (especially financial ones) allows you to keep your organization in good standing and continue pursuing your mission.  

This guide will review some of the top nonprofit financial regulations your organization must know and provide tips for staying compliant. 

IRS Regulations for Tax-Exempt Status 

To become a tax-exempt, 501(c)(3) organization, your nonprofit must meet various eligibility requirements, including operating as a true nonprofit that doesn’t supply earnings to private shareholders or individuals, only engaging in activities that support your mission, and not participating in political campaigning or substantial lobbying. 

However, once you become a tax-exempt organization, you must follow certain compliance requirements to maintain tax-exempt status. In addition to continuing to adhere to standard nonprofit eligibility requirements, these rules include: 

• Filing Form 990 each year. In lieu of a typical tax return, your nonprofit will fill out Form 990 annually to maintain tax-exempt status. This form requires you to report your yearly revenue and expenses to demonstrate responsible resource allocation in service of your mission. 

• Publicizing annual returns. You must make your nonprofit’s Form 990 and exemption application publicly available. While not required, many organizations also publicize their financial statements to increase transparency with stakeholders. 

• Providing written acknowledgments to donors. Although it’s best practice to provide donation receipts to all donors, nonprofits must provide a written acknowledgment of receipt to any donor who contributes a gift of $250 or more for tax-deductibility purposes. These acknowledgments should include your nonprofit’s name and Employer Identification Number (EIN), the date you received the gift, the amount of the cash contribution (or description of a non-cash contribution), and a statement that your organization provided no goods or services in exchange for the gift. 

• Paying Unrelated Business Tax Income (UBIT). Tax-exempt status only applies to income related to your mission. If your nonprofit engages in business activities unrelated to its mission (such as selling merchandise to the general public), you’ll have to pay taxes on the resulting income. 

Accounting Standards 

The Financial Accounting Standards Board (FASB) sets and updates the Generally Accepted Accounting Principles (GAAP) in the United States. These principles standardize financial reporting practices and ensure both for-profit and nonprofit organizations follow the same financial management standards. 

The core GAAP framework principles are: 

• Principle of regularity. Your nonprofit’s accounting systems and procedures must follow GAAP’s standards. 

• Principle of consistency. Your nonprofit must use the same accounting standards across every recording period. 

• Principle of sincerity. Your nonprofit must produce accurate financial records. 

• Principle of permanence of methods. Your nonprofit must use the same accounting procedures across records and financial periods. 

• Principle of non-compensation. Your nonprofit must be transparent about all debts and expenses. 

• Principle of prudence. Your nonprofit’s financial reports should be based in fact, not speculation. 

• Principle of continuity. Your nonprofit should value assets under the assumption that your organization will continue to operate. 

• Principle of periodicity. Your nonprofit should develop financial reports on a regular basis, whether annually, quarterly, or monthly. 

• Principle of materiality. Your nonprofit should truthfully disclose all financial information. 

• Principle of utmost good faith. Everyone acting in your nonprofit’s accounting process should act honestly. 

Under GAAP, all nonprofits must compile a full set of nonprofit financial statements, which includes a Statement of Financial Position, Statement of Activities, and Statement of Cash Flows. Additionally, they must provide a functional expense breakdown, which most organizations choose to do as a Statement of Functional Expenses. 

State and Local Regulations 

In addition to federal regulations, your nonprofit may also be subject to state and local regulations, such as: 

• State tax exemption. To avoid state income taxes and receive state-specific benefits, your nonprofit may have to apply for state-level tax-exempt status. This process differs from state to state. For example, in Georgia, charitable organizations can receive income tax exemptions by attaching their IRS determination letter and articles of incorporation to their annual returns, whereas nonprofits in Michigan are automatically exempt from state income tax. 

• Sales tax exemption. Every state has different rules surrounding sales tax exemptions. For instance, nonprofits in Colorado with an IRS determination letter can apply for sales tax exemption, nonprofits in Connecticut with an IRS determination letter are automatically exempt from sales tax, and certain types of nonprofits in California, such as volunteer fire departments and veterans’ organizations, are eligible for sales tax exemptions. 

• State nonprofit corporation registration. Nonprofits that are incorporated entities must register with the state annually. While every state has slightly different requirements, most require nonprofit corporations to update their contact information and file their annual reports with the state. 

• Fundraising regulations. Before soliciting donations, many states require nonprofits to complete their charitable solicitation registration process. Each state has its own requirements and forms, and most also require annual or bi-annual renewal filings. You must individually register with each state where your nonprofit will solicit donations. 

How to Stay Compliant with Nonprofit Financial Regulations 

To remain compliant with the nonprofit financial regulations listed above, follow these steps: 

• Understand what applies to your organization. You can’t stay compliant if you don’t know the rules and regulations your nonprofit must follow. Familiarize yourself with the financial regulations we’ve discussed and others that apply to your specific state and local area. Track all required forms and due dates in a spreadsheet to avoid missing anything. 

• File required tax forms. In addition to Form 990, there may be other tax forms your organization has to file depending on its financial activities. For example, YPTC explains that, “When you hire an outside vendor or contractor and pay them more than $600 for their services, you need to request a W-9 from them. You’ll gain access to information like their TIN and mailing address so you can include this information (alongside the income you’ve paid them) on Form 1099.” 

• Establish internal controls. Internal controls reduce financial reporting errors and minimize risk, helping your nonprofit maintain compliance with financial regulations. Create clear financial policies and procedures, and divide responsibilities among team members so no single individual has too much control over your nonprofit’s finances. 

• Maintain transparent financial reporting. Many nonprofit financial regulations require your organization to create and update accurate financial statements. Share regular financial updates with both internal and external stakeholders, and conduct a financial statement audit to ensure your records are up to standard. 

Compliance with nonprofit financial regulations allows you to avoid associated penalties and continue making a difference in your community. Stay up to date with the regulations that apply to your organization, and fill out all required forms on time to remain in good standing. 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.