{"id":4849,"date":"2016-04-04T10:47:45","date_gmt":"2016-04-04T15:47:45","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/incorporation-and-legal-structures\/nonprofit-financial-statements.html"},"modified":"2025-10-16T23:30:00","modified_gmt":"2025-10-17T04:30:00","slug":"nonprofit-financial-statements","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/incorporation-and-legal-structures\/nonprofit-financial-statements.html","title":{"rendered":"Nonprofit Financial Statements"},"content":{"rendered":"\n
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Nonprofit Financial Statements<\/h1>\n\n
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\n By Jade Yeban, Esq.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
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Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n <\/div>\n \n

\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

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Nonprofit<\/span> organizations<\/span> are subject to specific financial reporting requirements to ensure transparency and accountability to their donors, grantors, and the public.<\/p>\n\n <\/div>\n\n\n\n

Nonprofit<\/span> organizations<\/span> are special types of business entities. They exist to serve the community, not to make a profit. Unlike for-profit corporations, nonprofits<\/span> focus on specific missions other than making money. These include goals like helping people, animals, or the environment.<\/p>\n

To\u00a0start a nonprofit<\/span><\/a>, you need to\u00a0file articles of incorporation<\/a>\u00a0with the secretary of state\u2019s office. You also need to\u00a0create bylaws<\/a>. After this, you become a legal entity, like a small business or a limited liability company<\/a> (LLC).<\/p>\n

One big perk for nonprofits<\/span><\/a> is that they can be tax-exempt. This means they don\u2019t have to pay some taxes that for-profit businesses are required to. To get these benefits, a nonprofit<\/span> must apply to the\u00a0Internal Revenue Service<\/a>\u00a0(IRS<\/span>). They have to meet and maintain certain requirements to keep their tax-exempt status<\/span>.<\/p>\n

This article provides a brief overview of nonprofit<\/span><\/a> financial statements. Learn more about the requirements of a tax-exempt nonprofit<\/span> organization<\/span> below.<\/p>\n

Nonprofit<\/span> Tax Status<\/h2>\n

Nonprofits<\/span> enjoy\u00a0several tax benefits<\/a>, setting them apart from for-profit entities. In addition,\u00a0charitable contributions<\/a>\u00a0made to these organizations can be tax-deductible for donors. This aspect is a significant incentive for public donations. Nonprofits<\/span> must also adhere to specific financial reporting requirements. They must do so to maintain their tax-exempt status<\/span>. These requirements ensure transparency in the organization\u2019s financial activities.<\/p>\n

However, to access these benefits, a nonprofit<\/span> must first gain tax-exempt status<\/span>. This involves a detailed application process with the IRS<\/span>. Upon approval, nonprofits<\/span><\/a> are exempted from certain federal income taxes. This status significantly aids in financial management<\/span> and resource allocation<\/span>.<\/p>\n

Tax-exempt status<\/span> is considered a privilege. Its maintenance demands strict adherence to the IRS<\/span> regulations. Understanding these benefits and responsibilities is crucial for anyone involved in managing or overseeing a nonprofit<\/span> organization<\/span>. See FindLaw\u2019s\u00a0Becoming a Tax-Exempt Organization<\/span><\/a>\u00a0to learn more.<\/p>\n

Isn\u2019t My Nonprofit<\/span> Automatically Tax-Exempt?<\/h2>\n

Many people assume that once they incorporate their nonprofit<\/span>, it automatically becomes tax-exempt. This is not the case, however, and\u00a0is a common misconception. Keep in mind that nonprofit<\/span> status refers only to your state\u2019s laws about corporate status. Meanwhile, tax-exempt refers to federal and state exemption under the U.S. tax code. As a nonprofit<\/span> organization<\/span>, you have to apply for special tax designations under 501(c)(3). They are not automatic.<\/p>\n

After incorporation, a separate application for tax-exempt status<\/span> is required. This process involves submitting\u00a0IRS<\/span> Form 1023<\/a>\u00a0or\u00a01023-EZ<\/a>. Approval by the IRS<\/span> is not guaranteed. It requires a thorough review of the nonprofit<\/span>\u2019s purpose and operations. This process demands detailed documentation. It also demands a clear demonstration of the nonprofit<\/span>\u2019s charitable nature. If approved, the organization then enjoys tax-exempt status<\/span>.<\/p>\n

It\u2019s important to note that this status can be revoked if the organization fails to adhere to the required standards. So, continuous compliance with the IRS<\/span> rules is essential. The journey to achieving and maintaining tax-exempt status<\/span> is a crucial aspect of running a nonprofit<\/span>. It demands both attention and care. See FindLaw\u2019s\u00a0Keeping Your Nonprofit<\/span> Tax-Exempt Status<\/span><\/a>\u00a0to learn more about maintaining your status.<\/p>\n

Requirements After Obtaining Tax-Exempt Status<\/span><\/h2>\n

Gaining tax-exempt status<\/span> is just the beginning for a nonprofit<\/span>. After this milestone, several ongoing filing requirements must be met.<\/p>\n

Annual Tax Return<\/span><\/strong><\/p>\n

Firstly, nonprofits<\/span> must file an annual tax return<\/span> with the IRS<\/span> at the end of the fiscal year<\/span>, typically using\u00a0Form 990<\/span><\/a>. This annual report<\/span> discloses the organization\u2019s financial activities such as a statement of revenue and a statement of functional expenses<\/span>.<\/p>\n

Keeping accurate and detailed financial reports is essential. These reports should include all aspects of the nonprofit<\/span>\u2019s finances. This includes fundraising<\/span> efforts and charitable contributions received.<\/p>\n

Annual Report<\/span> and Filing Fee<\/strong><\/p>\n

Additionally, depending on your state, your nonprofit<\/span> organization<\/span> must pay an annual filing fee or file an annual report<\/span>. Any changes in the nonprofit<\/span>\u2019s structure, such as adjustments in the board of directors or registered agent, must be reported. These requirements ensure the organization remains transparent and accountable.<\/p>\n

Compliance<\/strong><\/p>\n

It\u2019s also essential for nonprofits<\/span> to adhere to their stated mission and bylaws. Deviating from these can jeopardize the organization\u2019s tax-exempt status<\/span>. The post-tax exemption phase is crucial for the longevity of a nonprofit<\/span>.<\/p>\n

Do 501(c)(3) Nonprofit<\/span> Corporations Have To Make Their Financial Statements Public?<\/h2>\n

Yes. Transparency is a cornerstone of 501(c)(3) nonprofit<\/span> corporations. These organizations are required by law to make their tax returns<\/span> available to the general public.<\/p>\n

The rationale behind this rule is to ensure public confidence in the organization. By disclosing financial information<\/span>, nonprofits<\/span> show accountability to their donors. It also promotes trust with the general public. This transparency also helps in attracting potential donors and supporters.<\/p>\n

They also offer insights into the organization\u2019s fundraising<\/span> activities and how funds are utilized. Nonprofit<\/span> financial reporting<\/span> is not only a legal requirement but also a best practice in nonprofit<\/span> management. It fosters trust and integrity in the organization\u2019s <\/span>financial health<\/span> and allows donors to make informed decisions<\/span> about giving. These are both vital for the success of any nonprofit<\/span> organization<\/span>.<\/p>\n

In order to maintain accurate financial data<\/span>, invest in an accounting software<\/span> or hire a CPA familiar with nonprofit<\/span> accounting<\/span>. The CPA should follow the generally accepted accounting principles<\/span> (GAAP<\/span>) to generate a nonprofit<\/span> statement of financial position<\/span> that includes total assets<\/span> and liabilities.<\/p>\n

The report provides an overview of the nonprofit<\/span>\u2019s financial health<\/span> and activities. The four main statements are:<\/p>\n