What nonprofits should know before renewing sales tax exemption in Virginia
Retail sales and use tax exemption is not automatic for Virginia nonprofit organizations. In fact, a number of informational documents must be provided annually and upon application for renewal.
The most significant of these requirements becomes applicable when an organization reaches $750,000 in gross annual revenue (based on the organization’s IRS Form 990). Upon reaching this threshold, the organization must undergo a financial statement review by an independent CPA. Upon reaching $1,500,000 in gross annual revenue, Virginia Tax may require a financial statement audit (in lieu of a review).
Organizations may be taken by surprise with this requirement when filing for renewal. Planning ahead and preparation for your organization’s first review is critical.
Key preparation points
- Learn about the process of undergoing a financial statement review or audit. An understanding of requirements up-front can reduce the burden on the organization’s personnel and minimize resource investment.
- Ensure the organization has personnel in place to adequately supervise the engagement. Management must have the skills, knowledge, and experience to take ownership for the financial statements. Consider options such as outsourced bookkeeper resources or fractional CFO oversight as needed.
- Understand the differences between GAAP, accrual, and cash basis financial statements. Prior to an initial review, an organization may lean more heavily on cash or accrual basis reporting. During a conversion to GAAP financial records, certain accounts may cause complexity and significant time investment to adjust, including:
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- Revenue classification and accounting, including sponsorships, earned revenue sources, and contributions
- Contributions of non-financial assets
- Special event revenue and expenses
- Accounting for leases in accordance with ASC 842
- Functional expense classification and allocation of joint activities
Consider the needs of the financial statement users outside of the Sales Tax Exemption requirement to determine which presentation will be most useful beneficial to the organization.
- Find the silver lining! Consider what benefits may arise once the organization’s financial statements are reviewed or audited. The organization may gain access to certain grant opportunities and a more sophisticated donor base may become engaged. It also prepares the organization for potential future debt needs. During a financial statement audit, the organization’s auditor may also identify operational areas for improvement and opportunities to strengthen the internal control environment.
Keiter’s not-for-profit tax team is available to help navigate tax law for your organization. Questions? Contact your Keiter Opportunity Advisor.
Source
Retail Sales and Use Tax Exemptions for Nonprofit Organizations
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.
