CPA for Nonprofits

Category: Nonprofits | Reading time: approx. 7 minutes

Nonprofits (Amutot) and Public Benefit Companies (Chal"tz) are a significant engine in Israeli society — approximately 45,000 active nonprofits operate in welfare, education, health, culture, and community. However, their operating framework is complex from a regulatory, professional, and accounting perspective, including ongoing interfaces with the Registrar of Nonprofits, the Tax Authority, the Corporations Authority, and at times the Anti-Money Laundering Authority. Working with a CPA experienced in this field is not a luxury — it is essential to obtain proper-management certification, to qualify for tax benefits, and to raise public donations.

The Accounting Obligations of a Nonprofit

A registered nonprofit has several formal annual obligations:

Bookkeeping per the Income Tax (Bookkeeping) Directives — double-entry accounting for nonprofits with revenue above ILS 300,000.
Annual audited financial statements, signed by a CPA.
Narrative report describing the nonprofit's activities.
Filing reports with the Registrar of Nonprofits within 6 months of year-end.
General-assembly protocol approving the statements.
Form 5950 to the Tax Authority — nonprofit return.
Payroll file and 102, 126 reports, etc.

Proper-Management Certification — The Gateway to Funding

The proper-management certification (Ishur Nihul Takin) from the Registrar of Nonprofits is the most important document for a nonprofit. It is a necessary condition to receive support from government ministries, public institutions, and major donors. To obtain certification, the following are required:

Timely filing of financial and narrative reports.
Proper and organized accounting.
Active board of directors and functioning audit committee.
Compliance with legal requirements regarding officer appointments.
No material deficiencies in the submitted reports.

Losing proper-management certification can paralyze a nonprofit for months — and the process of restoring it is complex and requires professional support.

Section 46 Approval — Eligibility for Tax-Deductible Donations

Section 46 of the Income Tax Ordinance grants a 35% tax credit to individual donors and 23% to companies. A Section 46 certificate is a valuable asset to a nonprofit — it substantially increases its ability to raise donations. Eligibility conditions:

The nonprofit serves a recognized public purpose (education, health, welfare, religion, research).
General and administrative expenses do not exceed a reasonable percentage (typically up to 22% of total expenses).
Proper-management certification is in place.
Minimum activity scope (currently: ILS 500,000 per year).
No transfer of profits to stakeholders.

Tax Issues Specific to Nonprofits

VAT

Nonprofits classified as "non-profit institutions" (Malkar) do not collect VAT on output but also cannot offset input VAT. Instead, they pay payroll tax at 7.5% on employee salaries. Choosing the correct VAT structure dramatically affects operating cost.

Income Tax

A nonprofit is exempt from income tax on its public activity, but is liable to tax on business activity. The line between the two is not always clear and requires careful distinction.

Withholding Tax at Source

Nonprofits are required to withhold tax at source on payments to self-employed at special rates. Errors can lead to fines and loss of certifications.

Common Mistakes in Nonprofits

Late filing of annual reports — the #1 cause of losing proper-management certification.
Mixing donation funds with business-activity funds.
Failure to properly document in-kind donations.
Failure to follow proper board decision-making procedures.
Improper use of nonprofit assets for board members' benefit.
Failure to separate the CEO from board membership (conflict of interest).

💡 Recommendation from the Firm

Our firm accompanies dozens of nonprofits and public benefit companies across many fields — education, society, health, research, and culture. We provide the full envelope of services: audit, support before the Registrar of Nonprofits, applications for proper-management and Section 46 certifications, tax advisory, bylaws, protocols, and more. CPA Hanoch Hager, a senior partner with a Big-4 background, leads the nonprofit and public-body audit area.

Summary

Proper accounting management of a nonprofit is a complex task requiring unique knowledge, accumulated experience, and ongoing contact with the authorities. Choosing a CPA with proven experience in the nonprofit field will save you time, money, and headaches — and allow you to focus on the main thing: advancing the public mission for which the nonprofit was established.