Accounting for your Nonprofit Website

By Peggy E. Topel, CPA

The number of nonprofit organizations developing websites is rapidly increasing, and the amount of cost involved varies based on the site's functionality. Professional accounting literature has categorized website development costs into specific stages, and has specified how the costs should be recorded during each stage of development. How the costs are recorded can vary from expensing immediately to capitalizing and expensing as depreciation over the expected life of the website functionality.

The IRS is also interested in websites, and has issued guidance regarding acceptable activities for a nonprofit organization's website, including specific activities that can create unrelated business income tax and activities that may jeopardize an organization's nonprofit status.

Website Development

The cost of developing a website has been divided into five stages, each with differing accounting requirements:

• Planning the website - includes a wide range of costs, such as developing a site plan, determining the functionality and identifying hardware and software requirements. All costs incurred in this stage are generally expensed.

• Developing the applications and infrastructure - may include costs to acquire or develop both hardware and software needed to operate the site. Such costs are generally capitalized.

• Developing graphics - involves designing and laying out the web page using graphics. Graphics developed at this stage have been determined to be a component of the initial software costs and should be capitalized.

• Developing content - could involve creating content, entering the initial content into the website and integrating databases. Costs incurred at this stage are generally expensed, but may be capitalized if they are closely related to the initial website setup or creation.

• Operating the site - Costs of training and site maintenance should be expensed as incurred. However, certain costs of enhancements may be capitalized if it is probable they will result in added functionality.

These accounting rules pertain to costs incurred to develop a website for the nonprofit's use. If a plan exists to market the software externally, the accounting rules can differ significantly.

Website Use

Nonprofit prohibitions against involvement in certain activities also apply to activities conducted on a nonprofit's website. Discerning compliance or noncompliance can be difficult, and the organization should start with the following questions:

» Are there any items sold on the site subject to unrelated business income rules?

» Does any advertising appear on the site?

» Are there any links to commercial websites?

» Are there any activities or aspects of the website that might be political in nature or serve the interests of a political candidate or issue?

The IRS is developing and updating standards as individual cases are brought under scrutiny.

Additionally, the National Association of State Charity Officials is reviewing regulations related to the solicitation of charitable contributions via the internet. Their current position is that organizations that specifically focus solicitation efforts in particular states should be required to register within those states. They are also considering whether organizations that regularly receive substantial contributions from a particular state, even if solicitation is not specifically targeting that state, should also be required to register within that state.

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All of these aspects of website development and operation are relatively new and may be complex. Nonprofit organizations should carefully examine their accounting for website development costs and subsequent use of their website to ensure their compliance with existing guidance.

For more information, contact Peggy Topel at Gordon, Hughes & Banks, LLP at (303) 770-5700 or www.ghbcpa.com.