To maintain your 501(c)(3) status and stay in good standing, it is important to keep accurate and comprehensive records. Maintaining good records prevents you from having your 501(c)(3) status revoked and makes it easy to prove you are in compliance with all the rules and regulations that 501(c)(3)s are bound to for tax exemption purposes.
Nonprofits could also face penalties if they aren’t able to prove compliance with relevant recordkeeping regulations.
Why Keep Records?
There are several reasons why you should maintain good records for your 501(c)(3). Good recordkeeping can help you evaluate your charitable programs, monitor budgetary results, prepare financial statements, identify sources of receipts, comply with grant-making procedures, and comply with racial non-discrimination requirements.
Evaluate Charitable Programs
Good recordkeeping can help a nonprofit determine the success of its charitable programs. Are your charitable programs doing well? What might be some of their shortcomings? This will allow you to make any necessary changes or improvements.
Monitor Budgetary Results
In order to assess whether you have stayed within your budget, you’ll need good records. This will allow you to see where you may have overspent and underspent, and it can help you better plan your budget moving forward.
Prepare Financial Statements
You will need to prepare annual financial statements, and maintaining financial records will help make that process easier and more efficient. This is especially important if you’re working with banks, creditors, contributors, and funding organizations. Some states even require you to make audited financial statements public for your nonprofit, so be sure to check with your state to see if this is the case.
Identify Sources of Receipts
By keeping all the receipts, a nonprofit can keep track of where the money is coming from and where it is going. This will help separate program receipts from non-program receipts and taxable income from non-taxable income. Nonprofits should also maintain an organized list of donors and grantors with the amount each donor and grantor contributes to the organization. Keeping track of receipts will help with this.
Comply with Grant-Making Procedures
Public charities that make grants to individuals must keep proper records and case histories to show that the grants serve their charitable purpose. Case histories should include names, addresses, purposes of grants, how the individual was chosen, and the relationship (if any) the individual has with any member, officer, trustee, or donor of the organization. Schedule I of Form 990 provides further details on what records are required for grants made within the United States. Schedule F of Form 990 provides further details on what records are required for foreign grants.
Comply with Racial Nondiscrimination Requirements
Private schools are required to comply with racial non-discrimination requirements. This includes annually publishing a racial non-discrimination policy through the newspaper or via broadcast media to the community it serves. Schedule E of Form 990 provides further details on these requirements.
Which Records Should You Keep?
The IRS breaks down the records 501(c)(3)s should keep into four categories: money coming in, money going out, employment tax records, and asset records.
Money Coming In
Keep track of all the money that comes into your organization, including cash register receipts, bank deposit slips, receipt books, invoices, credit card slips, and any Form 1099-MISC you send to the IRS. This amount is the sum of all the money the nonprofit receives, including contributions.
Money Going Out
Money going out covers any expenses and purchases of the organization. Records will include statements, canceled checks, cash register receipts, credit card sales slips, invoices, and petty cash slips.
Employment
All employment tax records including documents that show salaries, wages, benefits paid, and taxes withheld.
Assets and Liabilities
Be sure to maintain records showing what assets your nonprofit owns, such as buildings, furniture, or investments. Such records should show when an asset was purchased, any debt used to purchase it, the purchase price, the sale price, the expense of selling it, the cost of any improvements, deductions taken for any depreciation or destruction of the asset, how the asset is or was used, and when and how the asset was disposed of.
How Long Should Records be Kept?
For records that fall under “money coming in” or “money going out,” you’ll want to save these records for three years after the date the return is due or filed, whichever is later. Keep in mind that some interested parties such as grantors, insurance companies, creditors, or state agencies may require you to hold on to records for a longer period.
Employment tax records, on the other hand, should be kept for at least four years.
What Will Disqualify You as a 501(c)(3)?
Good recordkeeping can help you stay in compliance, but also remember to avoid the following:
- Falling away from the purpose. Remember that 501(c)(3)s must operate for one of the following purposes: religion, charity, science, testing for public safety, literary, education, fostering national or international amateur sports, and preventing abuse of animals or children.
- Personal benefit. The nonprofit cannot be operated for personal gains or interests.
- Profits cannot be used for private shareholders or individuals. Nonprofits can make a profit, but any profit made must go towards charitable services. It cannot go into personal pockets.
- Political and lobbying activities. Only a small portion of the budget may be used for political and lobbying activities, and nonprofits cannot endorse political candidates or donate to political campaigns.
- Not meeting annual reporting requirements. Other than churches and subordinate organizations, all public charities must file Form 990 with the IRS each year. Smaller organizations with gross receipts of less than $50,000 can file Form 990 N. Most states also require annual reporting, and there are typically four types: corporate filings, financial filings, fundraising registrations, and state tax exemption filings.
- Unrelated business income. Revenue generated from ongoing business unrelated to the nonprofit’s exempt purpose is prohibited.
Maintaining records is important to keep your nonprofit in compliance with the rules and regulations that govern 501(c)(3)s, but doing so also helps you assess and plan the growth of your nonprofit.