Charity and taxes in Ukraine: features of the accounting of a charitable foundation
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The main task of charitable organizations is to distribute aid to the “target audience”. Charitable organizations have their own mission and goal, and it is very important to know and understand this goal for accounting of this company. “Costs” are distributed and income is taken into account according to the dependency.
Our firm provides legal and accounting services to nonprofit organizations, including charitable foundations. Today we will tell you about the most common aspects of accounting in such organizations, taken from our practice.
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The principles of accounting for charity and payment of taxes in the charity fund
The funds of a charity organization come mainly from benefactors in the form of donations, and these proceeds must necessarily be used for their intended purpose.
During registration a charitable organization (CO) submits an application for inclusion in the register of nonprofit organizations. To receive donations, a charitable organization may write a letter requesting assistance specifying where the funds will be sent. Benefactors may be both individuals and legal entities.
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So how is the charitable assistance reflected in the parties’ documents?
The assisting company (benefactor) has an opportunity to include the amount of assistance in expenses not exceeding 4% of the taxable profit for the previous year. The exceeding amount of charitable assistance is not included in expenses, but can be only from the company’s profit.
A charitable foundation may receive income of several types: target income, general and passive income.
Target income is the funds received for a certain project. For example, a CO attracts money for an operation. A letter of assistance was sent to the organization, which transferred funds to cover the costs of the purpose.
General income is the funds received without specifying the purpose.
How to record income of the charity fund in the accounts
Different types of income are recorded in the accounts in a certain way.
Target income is recorded in the account 48 “target financing” and is recognized as income in the period of its intended use.
General and passive income can be used both for achieving a certain goal and for maintenance of the organization as a whole. This income is recorded in the account 718 “income from gratuitous transfer of assets” or 73 “other financial income”.
COs are not taxpayers, and income is recognized along with expenses in reports on financial results - they do not generate profit. All funds that were received but not spent in the period of receipt are recorded in the account 69 “prepaid income”.
Of course, it is of great importance that the “income” of the charitable foundation is correctly recorded in order to avoid losing its nonprofit status.
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What to do if a charity foundation provides services or sells goods?
To achieve its objectives, CO may receive funds from the sale of goods/services. These funds should not “make profit”, but can be used to implement the organization’s mission.
As an example, we can consider a CO that has a sewing machine (which, for example, was received as a gift or bought by the fund). The CO employees may sew clothes or underwear for socially unprotected citizens of nursing homes, boarding schools, etc. They can also make handmade products (bags, toys) from the remnants of fabric and sell them at fairs. The funds received from the sale have no purpose, and must necessarily be used in the activities of the CO for its maintenance, or to implement the purpose (in our case, it may be the purchase of fabric or payment of wages to employees).
Humanitarian assistance should be considered separately. To receive it, the CO should be included in the list of recipients of such assistance. And when receiving and using it, it is necessary to be guided by the norms of the Law on Humanitarian Assistance, and submit a plan for the distribution of humanitarian supplies to the Ministry of Social Policy.
Our accountant, who you don’t need to take on the staff, can organize the whole accounting process or help you at the start.
Do you want to learn more about accounting of a charity fund or use the outsourced services of our accountants? Give us a call! We will help you to make the solution of your legal issues simple.
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