For-profit and not-for-profit entities have different motives and therefore have several distinct features. While nonprofits are mainly interested in meeting the needs of society, for-profits are focused on making profits from sales of goods and services. They, therefore, differ in aspects such as in employment, organization management, tax exemption benefits, and how they generate revenues (Saul, 2007). The following sections depict the significant differences in the financial statements and tax returns between profit and nonprofit organizations.
Financial Reports/ Statements
Profit entities usually report their profitability to the shareholders and investors as a proxy for how the shareholders share retained earnings. Nonprofits, on the other hand, report on their financial position, stability, and usage of funds to the board, donors, and society.
Reporting Assets and Liabilities
Balance Sheet Versus Statement of Financial PositionA profit entity prepares a balance sheet which summarizes the company’s assets, liabilities, and shareholder equity, obtained by getting the difference between liabilities and assets and debts. Nonprofit entities, on the other hand, have no distinct owners (Bowman, 2011). Thus, its balance sheet refers to as a statement of financial position tracking the organization's assets and liabilities
Shareholder’s Equity Versus Net Assets
The owner's equity shows the company's net worth and benefits shareholders, current investors, and potential investors. Unlike in a profit entity, the difference between liabilities and assets gives rise to net assets representing the nonprofit's net worth. The resultant net assets are divided into unrestricted, temporarily restricted, and permanently restricted depending on donor restrictions.
Reporting Revenues and Expenses
A profit tracks net income based on the sale of products and services. Its income statement lists revenues and expenditure over a given time, usually quarterly or yearly. It also indicates whether the company is making a profit or a loss. This information helps them in evaluating their overall financial performance (Saul, 2007). On the other hand, nonprofits often depend on grants, investment incomes, fundraisers, and donations. Therefore, they track the excess revenues over expenditures using the statement of activities instead of an income statement. Since it is not profit-oriented, but motivated to offer charitable services or a mission, the account activities reports variations to the net assets of an organization (unrestricted, provisionally restricted, and permanently restricted) that concern the income and expenses of the organization for the current fiscal year.
Additionally, in reporting, nonprofits are usually concerned with transparency as opposed to profit entities. Nonprofits, therefore, include disclosures such as the amount of donor-imposed restrictions on net assets. The usage of donations made to nonprofits is usually restricted. Funds are only authorized exclusively for permitted purposes as well as on the stipulated in the grant contract. Such that, if a grant apportions $50,000 for the purchase of test kits, the money cannot purchase computers without authorization from the grantors.
Cash Flow Statement
These show the flow of cash in and out of the company. Both profits and nonprofits organizations generate money from three different business activities. Operations, investing, and financing. Under Investing Activities, both entities list the flow of money in and out that is related to purchases and sales of assets with a long shelf live and investments. However, for non- profit,
Cash from Operating Activities: It contains the main business activities of raising unrestricted and temporarily restricted funding and providing program services.
Cash from Financing Activities: List of the flow of money in and out that is related to funds received and repayments of funds delivered by creditors and donors whose eternally restricted contributions appear in the activity statement.
Nonprofits do not pay federal income taxes under the provisions of the Internal Revenue System (IRS) Code Section 501(c)(3). It is because its motive provides benefits to society. Such entities may include universities and foundations. These institutions are, however, subject to income tax from related investment. State and local taxes, nevertheless, differ. Profit organizations, however, are subject to income tax resulting from sales of goods and services. Any activities that are not directly related to their principal purpose can be subject to tax. These Tax-exempt organizations may, however, make these organizations take advantage to earn more income. Unrelated business income tax prevents unfair competition between tax-exempted entities and for-profit (Bruce, 2015).
These nonprofits do not have to file an annual return as opposed to profit entities. Nonprofits also disclose their investment returns. Form 990 was designed mainly to help provide information on the tax return. It allows the Internal Revenue System (IRS) access if a nonprofit is compliant with several federal laws and is allowed to keep its tax-exemption (Bowman, 2011). The disclosures in nonprofits not necessarily subject to profit organizations presented in Form 990 include;
Governing Body and Management; Information provided in this section included; the number of voting members of the governing body at the end of the tax year, whether the employees have a family or a business relationship among themselves, any changes since the previous filling of form 900, etc.
Policies; That is, if the organization have local chapters, branches, or affiliates, whether it has a written conflict of interest policy, organization have a written whistleblower policy, or written document retention and destruction policy,
Compensation of current Officers, Directors and Key Employees (regardless of the amount of payment), Highest Compensated Employees (above $100,000), former directors or trustees (above $10,000 of reportable compensation), and Independent Contractors
Statement of Revenue, such as from contributions, gifts, grants, fundraising, etc.
Statement of Functional Expense Such as rants and other assistance to governments and organizations in the United States, office expense, advertising, royalties, insurance payments to affiliates, etc.
Reconciliation of net assets and Reconciliation of Expenses per Audited Financial Statements with Revenue/ Expenses per Return.
Ownership information on taxable subsidiaries
Information regarding transfers associated with personal benefit contracts
Information on audited and non-audited statements and whether they received a qualified or unqualified opinion
Public Charity Status and Public Support, e.g. to schools, churches, hospitals and research institutions as well as specifying the amount of monetary support
Thus, there exist some differences in their financial statements and tax returns since they have different motives. Profit companies are motivated by the desire to maximize profits for the shareholders. By contrast, nonprofit entities by charitable work and do not derive their revenues from sales. Nonprofit organizations' exemption of tax is therefore sensible.
Bowman, W. (2011). Finance fundamentals for nonprofits: building capacity and sustainability. Hoboken, N.J Wiley.
Bruce, H. (2015). The law of tax-exempt organizations. Hoboken, NJ: Wiley.
Saul, J. (2007). Benchmarking for nonprofits: how to measure, manage, and improve performance. Saint Paul, Minn.: Fieldstone Alliance.
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