Organizations described in section 501(c)(3) of the U.S. Tax code from the Internal Revenue Service (IRS) are commonly referred to as nonprofit or charitable organizations. 501C3 organizations are eligible to receive tax-deductible contributions in accordance with the IRS Code section 170. They are exempt from income tax and also usually exempt from property taxes. They must follow certain banking and accounting rules.
Application for 501C3 Status
To apply for recognition of tax-exempt, public charity status, officers of the 501C3 who will be administering the account/s for the charity need to fill out IRS Application Form 1023 according to the instructions provided in Publication 557 from the IRS website. The filing fee will depend upon the size of the organization's budget.
Because this application is an important legal document, the charity may wish to retain the services of an experienced corporate lawyer and an accountant to help them prepare it.
Filing for State And Local Tax Exemption
This must be done separately, based on the charity's location.
Application for Employer Identification Number (EIN)
The 501C3 officers should apply online for the charity's Employer Identification Number (EIN). This is required for the corporation to hire staff, and to open the charity's bank account/s.
Application for 501C3 Bank Account
501C3 officers need to apply for a bank account suitable for the tax status of a charity. The officers will need to present copies of IRS Form 1023 and provide their EIN.
Record-Keeping for 5013C Account
All documents pertaining to the 501C3 must be kept, including the Articles of Incorporation and minutes of all meetings. This includes the minutes of the meeting/s with the bank manager to set up the 501C3 account/s. All financial statements from the bank pertaining to the accounts, and all financial reports must be kept as well.
Accounting for a 5013C Account
An accountant experienced in 501C3 accounting will be able to help manage the account/s and reports. They will also be able to clear up any legal issues involved with regard to questions about fundraising and appropriate tax deductions and expenditures.
Charities are accountable to the public, those who donate, their patrons and sponsors, and, in some instances, government bodies which might award them grants. Therefore, it is essential to have clear and precise 501C3 account/s. Accounting can be done on according to the cash method of accounting during the start-up phase of the 501C3. Under the cash method, the accountant will note down every transaction in the account/s, expenses and income, on the actual day it occurs.
If the 501C3 account/s begin to involve many complicated transaction or donations in large lump sums, the officers of the charity may wish to switch to the accrual method of accounting. In the accrual method, the accountant will note down each transaction when the order is made, the item is delivered or the services are rendered, regardless of when the money for them will actually be received or paid out. For instance, the invoice may not be paid until 30 days from receipt of the item, but it is noted in the 501C3 account as soon as the item is sent or received.