Massachusetts is home to over 25,000 public charities. The state’s public charities division promotes and regulates public transparency of each nonprofit organization’s activities. This includes overseeing fundraising solicitations, protecting nonprofit assets from prohibited transfers to private companies or individuals as well as the publication of the organization’s filed reports. The filing requirements for Massachusetts nonprofit organizations include producing financial reports. These reports are mandatory for nonprofit organizations with income above the Commonwealth’s stated thresholds.
In a previous article, Advantages of Audits for Nonprofits, we highlighted how financial statement audits and similar engagements such as review or compilation engagements can be beneficial to an organization and its Board of Directors. This not only serves as compliance but also opens access to grants and external financing while providing a level of assurance to the Board.
Nonprofit organizations are under increased scrutiny to properly report donor-restricted amounts, make appropriate allocations of functional expenses, and provide more quantitative information regarding liquidity and how revenue is earned. A certified public accountant (CPA) can provide guidance on how to meet the required disclosures.
In Massachusetts, the required submission of an audit or a review is contingent upon the gross revenue of an organization for its fiscal year. This includes revenue from sources such as contributions, fundraising, program fees, investment income, and miscellaneous income.
Reviewed Financial Statements
Organizations that generate combined gross support and revenue greater than $200,000 but not exceeding $500,000 during the fiscal year are required to provide a set of financial statements to the Non-Profits and Public Charities Division of Massachusetts. At a minimum, these statements must be CPA reviewed but audited financial statements would also be considered acceptable if the organization wants the confidence of a higher-level audit service. The review engagement provides limited assurance that the financial statements are free from error. A CPA can accomplish this by identifying support for amounts reported in the accounting system, making inquiries of management, and performing a series of analytical procedures to identify any unusual financial ratios.
The reviewed financial statements are normally prepared in accordance with generally accepted accounting principles (GAAP) but the organization can opt to use another basis of accounting or financial accounting framework, such as a modified cash basis or income tax basis which may help to reduce the time and cost of financial statement preparation. When financial statements are prepared on another basis of accounting, the statements must disclose and describe how that basis differs from GAAP.
Audited Financial Statements
If a non-profit organization’s gross support and revenue exceeds $500,000 in a fiscal year, the organization will need to engage a CPA to perform an audit of the Organization’s financial statements for that year. An audit provides an opinion on whether the financial statements are presented fairly in accordance with generally accepted accounting principles. While an audit may not necessarily detect fraud, a nonprofit organization that receives an unqualified opinion in an audit engagement is considered to have received a “clean opinion” which is essentially the best rating possible. An audit involves verifying account balances with outside sources, sending confirmation requests, assessing risks and internal controls, making management inquiries, and performing analytical and wrap-up procedures. These audited financial statements must be prepared in accordance with generally accepted accounting principles (GAAP) and audited in accordance with generally accepted auditing standards applicable to not-for-profit and/or governmental organizations.
Filing Requirements for Massachusetts Nonprofit Organizations
Virtually all charitable nonprofits operating within Massachusetts are required to submit their organization’s annual 990 IRS information return with the Commonwealth’s Non-Profits and Public Charities Division, even if the organization’s income is below the financial statement threshold of $200,000. Recently, the Division made changes to the filing requirements for Massachusetts nonprofit organizations. Increasing the threshold for submitting IRS Form 990 to the Division from $5,000 to $25,000.
In order to comply with filing requirements for Massachusetts nonprofit organizations, the organization’s financial statements, and the 990-tax return are to be submitted with the annual Massachusetts Form PC. The Form’s questions and responses pertain to the Organization’s mission, current contact and compensation information, basic financial data, related party transactions, and solicitation activities. Any financial statements attached must be complete, in final form, unbound, and include an opinion letter signed by the preparing CPA.
Organizations Exempt from Filing Requirements
A select few non-profit organizations are exempt from the audit or review requirement.
- The Red Cross
- Veterans’ organizations
- Certain religious organizations
- Private foundations that file 990PF with the IRS
- Trusts filing probate accounts with the Division; and
- Certain trusts audited by state and federal agencies.
Our CPAs are experienced in nonprofit audits, review engagements, and exempt organization tax preparation. We aim to make your published reports more attractive to donors and our team remains ready to answer questions or assist in addressing the specific needs of your Board and Organization.