Nonprofit Income Accounts – Part I
As an introduction to nonprofit income, over the last few posts we explored where nonprofits get their income as reported on IRS Form 990. We also explored the concept of income diversification.
Unlike balance sheet accounts, income accounts can vary widely. Reasons for the diversity of income accounts include:
- Diversity in the types and sources of income among nonprofit organizations
- Requirements for presentation of income on IRS Form 990 and 990-EZ (see filing thresholds here)
- Presentation of income on audited financial statements as required by Generally Accepted Accounting Principles (GAAP) to communicate the organization’s major sources of income
- Desire to highlight a concentration of income from a particular customer or donor
- Management preference to see certain sources of income on the face of the profit and loss report
Despite the diversity of account names, there are a few main types of income accounts we see often:
- Gifts, Grants and Contributions – for various sources and types of donation income
- Gifts-in-Kind – for gifts of goods, services and below-market rents
- Program Service Income – for income earned in the conduct of programs that carry out the organization’s tax exempt purpose
- Special Events – for income from fundraising events which can include gift income and exchange income
- Merchandise Sales – such as from a thrift store or the sale of goods related to the organization’s purpose
- Investment Income – for income earned on investments, such as interest income
- Unrelated Business Income – for earned income subject to Federal income tax (not common in small organizations)
- Other Income – for other minor sources of income
In this and upcoming posts, we offer a list of income accounts with more information on each one and how they might be customized and used by an organization. We’ll start with two accounts that fall under the Gifts, Grants and Contributions category.
A federated campaign is a fundraising effort conducted by an agency, called a federated fund, which raises money from the general public and redistributes it to nonprofit organizations. One of the most well-known federated funds due to their workplace giving programs is United Way. Another large workplace giving program is the Combined Federal Campaign. Other federated funds operate in niches, such as EarthShare which manages workplace giving programs to benefit environmental causes.
United Way and other federated funds make grants to nonprofit organizations from the general donations they receive. In this sense they are similar to community foundations. Nonprofit organizations desiring funding go through an application process. Grants from a federated fund may be restricted as to purpose. Organizations that receive an annual grant from United Way, for example, can record such grants to an account called simply “United Way.”
If contributions via a federated campaign are earmarked by the donor for a particular organization, then those are individual contributions. In other words, the federated fund did not have a say in which organization to benefit. We have not run across an instance where this source of income was significant enough to warrant its own account, so we normally code such gifts to an account for general contributions.
Form 990 has a separate line on the Statement of Revenue to report income from “federated campaigns.” This is one good reason to keep a separate income account for United Way or other federated campaigns.
Annual donors are often called “members” by nonprofit organizations. The Nature Conservancy, for example, is a national organization with “members.”
The IRS has rules (are you surprised?) to define when membership dues can be treated as contributions. Here’s the scoop: When annual membership dues are $75 or less, the value of the member benefits can be disregarded and the entire amount reported as a contribution, provided the benefits consist of [ Reg. 1.170A-13(f)(8) ]: (1) rights or privileges that a member can exercise frequently during the membership period (e.g., discounted admissions or purchases) and (2) admission to events open only to members for which the organization reasonably projects that the cost per person (excluding allocable overhead) is within the limits established for “low cost articles” within the meaning of IRC Sec. 513(h)(2) . The low cost article amount for 2018 is $10.90 (Rev. Proc. 2017-58).
Form 990 has a separate line on the Statement of Revenue to report membership dues that are contributions. Per the Form 990 instructions, this line includes “membership dues and assessments that represent contributions from the public rather than payments for benefits received.” Therefore it’s a good idea to maintain a separate account for this type of income which we suggest calling “Membership Contributions” rather than “Membership Dues.”
Next week we continue with more on contribution income.