A nonprofit business is one that is organized according to the Internal Revenue code, section 501(c)3. The term “nonprofit” does not mean that such an organization cannot make any profit, but only that there are strict controls over what happens to any money it makes. Such charitable organizations exist for many reasons and include social welfare organizations and churches. They are generally operated in a manner similar to other businesses, but they do not have to pay taxes on money that comes into the organization.
Nonprofit organizations have strict money-handling requirements. They are not banned from earning money or paying a fair salary to workers, but they must comply with applicable laws or face fines and the possibility of losing their status as nonprofit organizations. Any money that a charitable organization earns must be applied toward the running of the organization and fulfilling its stated purpose. If an excessive amount of funds are paid to an individual, the IRS is likely to investigate and could penalize both the individual and the organization if the expenses are not appropriate.
Starting in 1933, there was a regulation in place called Regulation Q that controlled what types of entities were allowed to have interest-bearing checking accounts. This regulation was enacted in response to depression-era financial problems and stayed in force until it was repealed in July 2011. It caused some confusion about the ability of nonprofit businesses to maintain interest-bearing checking accounts, but they were not included under Regulation Q. Even before the repeal of this regulation, nonprofit organizations were able to have interest-bearing checking accounts.
Many banks and credit unions offer interest-bearing checking accounts, but they are not required to do so. Individuals, for-profit businesses and nonprofit organizations may all obtain such accounts. To receive interest on a checking account, there is usually a minimum amount that must be kept in the account. Policies and services vary greatly from one bank to another.
When a nonprofit business has an interest-bearing checking account, the interest should be treated the same as any other money brought in by the organization. This means that the organization will receive annual interest information on a Form 1099-INT, and that interest must be reported to the IRS on the appropriate 990 form as part of an annual information filing. Any nonprofit organization that fails to report for three years may lose its nonprofit status.
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