Record Keeping For Non Profits

Why is it important to keep proper financial records if you are a non profit?

A nonprofit 501c3 organization must keep books and records to show it complies with IRS tax rules, and it must be able to document the sources of receipts and expenditures reported on Form 990.  If an organization does not keep required records, it may be unable to show it qualifies for exemption. Thus, the organization may lose it's tax-exempt status. In addition, an organization may be unable to complete its tax returns accurately and may be subject to penalties. Record keeping and document retention policy should be included in the non profit bylaws of all 501c3 tax-exempt organizations.

Monitor Programs

An effective record keeping system enables an organization to monitor the progress of programs and aid in the preparation of financial statements and returns. Records can show whether programs are improving, which programs are successful, and what changes an organization may need to make.  Good records management can contribute to the success of a program and an organization.

Prepare Financial Statements

It is important for organizations to maintain revenue and expense statements and balance sheets to prepare accurate financial statements. These statements can help an organization when working with banks, creditors, contributors, and funding organizations.

Prepare Annual Returns and Tax Returns

Records must support income, expenses, and credits as reported on the Form 990 series of federal returns and on state tax returns. These can often be the same records used to monitor programs and prepare financial statements.

Also, books and records of exempt organizations must be available for inspection by the IRS.  If the IRS examines an organization’s returns, the organization may be asked to explain items reported. A complete set of records will speed up the examination.

Comply with Grant-Making Procedures

A charity that makes grants to individuals must keep adequate records to demonstrate that such grants serve charitable purposes. At a minimum, the records should show names and addresses of grantees, purpose of the grant, manner of selecting the grantees, and relationship of the grantees to any members, officers, trustees, or donors of the organization. In working with non profit organizations, I find that utilizing the "Class System" in Quickbooks, allows for us to run financials for each Grant that they manage. Not only does this help with filling out Grant required forms, it helps the non profit keep better track of each grant as income and expenses are managed.

What Records 501c3 nonprofits Should keep?

Except in a few cases, the law does not specify record keeping processes. A nonprofit corporation should keep records of board of directors’ meetings. Tax-exempt organizations can choose any record keeping system, suited to its activities, that shows its income and expenses. If an organization has more than one program, it should ensure records identify the income and expense items attributable to each program.

A record keeping system must include a summary of transactions. This is ordinarily written in the organization’s books, such as accounting journals and ledgers. The books must show, among other things, gross receipts, purchases, other expenses, employment taxes, and assets. For many small organizations, a checkbook may be the main source for entries in the books, while larger organizations need more sophisticated ledgers and records. All organizations must keep all documentation that supports the entries in the books.

Supporting Documents

Transactions such as contributions, purchases, sales, and payroll will generate supporting documents (e.g., grant applications and awards, sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks) that contain information to be recorded in accounting records. It is important to keep these documents because they support the entries in an organization’s books and on its tax and information returns. They should be marked and stored in a safe location.

Records Management

Gross Receipts:  Gross receipts are the amounts received from all sources, including contributions. An organization should keep supporting documents that show the amounts and sources of its gross receipts. Documents that show gross receipts include cash register tapes, bank deposit slips, receipt books, invoices, and credit card charge slips.

Purchases, Including Accounting For Inventory:  Purchases are items bought, including any items resold to customers.  If an organization produces items, it must account for any items resold to customers. It must also account for the cost of all raw materials or parts purchased for manufacturing into finished products.  Supporting documents should show the amount paid and verify the payment was for purchases.  Documents for purchases include canceled checks, cash register receipts, credit card sales slips, and invoices. These records will help an organization determine the value of its inventory at the end of the year.  See Publication 538, Accounting Periods and Methods, for general information on methods for valuing inventory.

Expenses: Expenses are the costs incurred by an organization to carry on its programs.  Supporting documents should show the amount paid and the purpose of the expense. Documents for expenses include canceled checks, cash register tapes, contracts, account statements, credit card sales slips, invoices, and petty cash slips for small cash payments.

Employment Taxes: Organizations with employees must keep records of compensation and specific employment tax records. See Publication 15, (Circular E), Employer’s Tax Guide, for details.

Records of Assets and Liabilities of a nonprofit 501c3

An organization must keep records to verify information about its assets and liabilities. Assets are the property an organization owns and uses in conducting its activities, such as investments, buildings, and furniture, and liabilities reflect the financial obligations of the organization. Records should show:

1. When and how the asset was acquired

2. Documents that support mortgages, notes, loans, or other forms of debt

3. Purchase price

4. Cost of improvements

5. Deductions taken for depreciation

6. Deductions taken for casualty losses, such as losses resulting from fires or storms

7. How the asset was used

8. When and how the asset was disposed of

9. Selling price

10. Expenses of the sale

Typical Documents Documents that show the above information include purchase and sales invoices, real estate closing statements, canceled checks, and financing documents. If an organization does not have canceled checks, it may be able to get payment information from account statements prepared by financial institutions. These include account statements prepared for the financial institution by a third party. Account statements must be legible. The following list shows the contents of acceptable account statements.

• Check: Check number, amount, payee’s name, and date the check amount was posted to the account by the financial institution.

• Electronic funds transfer: Amount transferred, payee’s name, and date the transfer was posted to the account by the financial institution

• Credit card: Amount charged, payee’s name, and transaction date

How Long To Keep Records For nonprofit Tax Purposes?

For federal tax purposes, an exempt organization must keep records that support an item of income or deduction on a return until the statute of limitations for that return runs.

The statute of limitations has run when the organization can no longer amend its return and the IRS can no longer assess additional tax. The statute of limitations generally runs three years after the date the return is due or filed, whichever is later. An organization may be required to retain records longer for other legal purposes, such as for state or local tax purposes.

Additional Record Retention Periods

Other record retention periods vary depending on the type of record or return.

Permanent Records:  Some records should be kept permanently.  These include the application for recognition of tax-exempt status, the determination letter recognizing tax-exempt status, organizing documents (such as articles of incorporation and by-laws, with amendments), and board minutes.

Employment Tax Records:  If an organization has employees, it must keep employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later.

Records for Non-Tax Purposes: An organization should keep records until they are no longer needed for non-tax purposes. For example, a grantor, insurance company, creditor, or state agency may require that records be kept longer than the IRS requires.