Part II: Elements of the IRS Application
Building Your Budget
For many, this can be one of the most daunting elements of the application for nonprofit status. The IRS requires 3 years of actual or projected budgets, including what you expect to make and how you plan to spend it.
People who are so capable and talented can pale at the prospect of this, so let’s make it as easy as possible.
Break down the overall concept of budget into its component parts:
Profit or loss.
Note: this is the information that will show up on your Profit & Loss Statement that will be part of your accounting reports.
To get your IRS application for the budget section started, ask yourself the following questions:
How much do you expect to take in? In whole numbers, how much do you believe you can accumulate in the first, second and third year of business
How do you expect to get it: as donations, contributions, sales of merchandise, the proceeds from events, or grants? Be as specific as you can be as you list events and requests.
How do you plan to keep track of this income? Do you have an accounting system? Be sure you understand the basic financial reports that you will be expected to provide:
1. A budget: This will have two parts: what you plan to spend or bring in, and what you actually spend and bring in.
2. A balance sheet: What you have, and where it is. What you owe, and to whom and by when. And the difference either way.
3. A Profit or Loss Statement: What you brought in, what you spent and whether you are making money or losing it.
What do you plan to do with the money you have taken in in that exceeds the costs of your programs? What if you spend more than you take in?
A strong recommendation is that your expenses follow a breakdown similar to this:
The IRS and other funders look for these types of percentages and will possibly not fund an organization that has combined administrative and fundraising expenses are above a certain percentage. You want to show both the IRS and anyone who examines your tax return, which will be a public document, once you are in business as a nonprofit, that you are applying your funds into the work you do, your programs.
It Does Indeed Take Money to Make Money
In addition, the IRS scrutinizes organizations with little or no fundraising expenses; it takes time, planning and funding to have a fundraising program, including how you keep records of what you receive.
It is important and that you keep careful track of your transactions: what you bring in and what you spend, then how you have spent it. Recording and reporting your financial activity looks one way for a balance sheet and P & L; the nonprofit tax return, the 990, is not asks for financial information is a different way, the more familiar you are with your finances ,the easier it will be to handle this required work. This requires some thought on how you categorize your income and expenses.
While accounting and budgeting are only a part of what you do, this information is a stark look at the financial aspect of your efforts. It is important to set up your systems carefully from the get-go, and commit to regular oversight.
Being comfortable with the basic comprehension of what your budget needs to look like will provide you, and the IRS, and donors and funders, that you do understand how best to shepherd and steward important funds.
Doing this correctly is crucial, give us a call and let us help make this a smooth path for you.
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