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  Tax Exemption Home: Non Profit / Exemption Information: Exemption Workshop - Chapter 7 - Record Keeping

Exemption Workshop - Chapter 7 - Record Keeping

Prioritize Recordkeeping
Basically, an organization has to keep records and books to prove that it agrees with tax rules. An organization should record all the sources of receipts and expenditures that are stated on Form 990, Return of Organization Exempt from Income Tax. To find more information on this Form 990, please read Chapter 8.

An organization that has a good recordkeeping system will be able to continually watch different programs as they progress and can help in the preparing of financial returns and statements.
An organization that does not keep important records may not be able to prove that it meets the required standards for the tax-exempt status. Due to this fact, an organization could lose its tax exemption. Besides this, an organization may not be able to fill out its returns correctly and it could be charged some penalties. The next paragraphs will fully show some of the features of great recordkeeping.

Monitor Programs
Keeping records can prove which programs are moving forward, which programs are having success, and if an organization should make changes. Good management over records can cause a program and organization to be successful.

Organize Financial Statements
It is wise for organizations to upkeep the revenue and expense balance sheets and statements in order to prepare correct financial statements. Financial statements such as these can aid an organization when they work with creditors, banks, contributors, and funding organizations.

Arrange Annual Returns and Tax Returns
Records have to support expenses, income and credits as they are reported on the state tax returns and the Form 990 series. In general, these records are the exact records used to continually watch programs and prepare financial statements. Records and books of organizations that are tax exempt must be ready for IRS inspection. If an organization's returns are inspected by the IRS, the organization could be asked to clarify items that are reported. A set of records that is all complete will quicken the examination.

Validation of Taxable Expenses and Revenue
A reason why good records should be kept is to cause expenses, revenues, and deductions to be substantial for Unrelated Business Income Tax purposes. An organization has to correctly keep track of expenses and revenues that are subject to UBIT in order to prepare its unrelated business income tax return on Form 990-T, Exempt Organization Income Tax Return. If more information is needed, please look over Chapter 6.

Abide by Grant-Making Procedures
A charity that supplies grants to people has to keep sufficient records to show that such grants do help towards charitable purposes. At the least, the records must show addresses and names of grantees, reason for the grant, manner of choosing the grantees, and the relationship of the grantees to any trustees, officers, members or donors that are part of the organization.

Obey Racial Nondiscrimination Requirements (Private Schools)
Private schools should have records that prove that they have met the requirements regarding racial nondiscrimination. This information must involve annual publication of a racially nondiscriminatory policy in broadcast media or newspapers offered to the community given by the school. To see more information, please read Schedule E, Schools, on the Form 990 and the directions for this form.

What Records Ought to Be Saved?
Except in some rare instances, the law doesn't identify the processes of recordkeeping. An organization is allowed to select any system of recordkeeping, suited to its activities, that distinctly reveals its expenses and income. If an organization has a few programs, it must make sure that the records accurately show the expense and income items that apply to all the programs. For instance, a corporation should have records of the times when the board of directors meet together. Generally, a system of recordkeeping ought to consist of a synopsis of transactions. This synopsis is usually penned in the books of an organization which include accounting ledgers and journals. The organization's books should include purchases, assets, employment taxes, gross receipts, and other expenses. Most little organizations have a checkbook as the chief basis for entries in the books, while bigger organizations need more refined records and ledgers. An organization also should save all the records that reinforce the book's entries.

Accounting Methods and Periods
Organizations are required to save their financial records established on a yearly accounting period that is entitled a tax year.

Accounting Methods: A method of accounting is a group of rules that are used to decide how and when expenses and income are reported. An organization selects a method of accounting when it files its first yearly return. There are two basic accounting methods:
•Cash method: When an organization chooses the cash method, it reports income in the tax year received. An organization commonly subtracts expenses in the year paid.
•Accrual method: When an organization chooses the accrual method, it would have to report income in the earned tax year, even though the organization might receive payment in a following year. The organization would report expenses in the incurred tax year, even if the expenses that year were paid or not paid.
To find more help regarding accounting methods and periods, read Publication 538, Accounting Periods and Methods, and the guides to Forms 990 and 990-EZ or Form 990-PF.

Accounting Periods: The tax year consists of twelve consecutive months. There are two types of tax years:
•Calendar tax year: This is a timeframe of 12 consecutive months starting January 1 and ending December 31
•Fiscal tax year: This is a timeframe of 12 consecutive months ending on the final day of any month not including December

Supporting Documents
Transactions including purchases, contributions, payroll and sales will produce supporting documents such as grant awards, grant applications, paid bills, sales slips, receipts, invoices, canceled checks and deposit slips. These documents have information that is to be recorded in accounting records. These documents should be kept because they reinforce the entries in an organization's books and the information and tax returns. Important documents have to be apparently marked and kept in a secure place.

Records Management
Gross Receipts: Gross receipts are the sums that are gained from all the sources, which include contributions. An organization ought to continue to maintain files that list the sources and amounts of its gross receipts. Bank deposit slips, receipt books, credit card change slips, invoices and register tapes are a few examples of documents that show gross receipts.

Purchases, Including Inventory Accounting: Bought items and items that have been resold to customers are considered as purchases. If an organization does produce items, it is required to keep track of all the items that have been resold to customers. An organization is also required to keep record of the charge for each part or raw material bought for construction into completed products. Important documents of purchases have to disclose the amount that was paid and confirm that the payment was for purchases. Cash register receipts, credit card sales slips, invoices and canceled checks are all examples of documents that are used for purchases. Keeping records will allow an organization to decide the value of its inventory at the year's end. Read Publication 538, Accounting Periods and Methods, for basic information on ways for valuing inventory.

Expenses: Costs that are acquired by an organization to continue on its programs are called expenses. Documents to record expenses must give the sum that was paid and the reason of the expense. Documents that keep track of expenses consist of cash register tapes, account statements, invoices, credit card sales slips, canceled checks, contracts, and petty cash slips for little payments of cash.

Employment Taxes: Organizations with employees have to save documents of compensation and employment tax records. Read Publication 15, (Circular E), Employer's Tax Guide, for more information.

Records of Liabilities and Assets
An organization has to keep records to confirm information about its liabilities and assets. An organization uses and owns assets as its property in hosting its activities including furniture, investments, buildings and liabilities that show the financial responsibilities of the organization. Records must display:
•How and When the asset was obtained
•Files that support loans, mortgages, notes, or other types of debt
• Cost of improvements
• Deductions taken for depreciation
• Deductions taken for casualty losses, such as losses resulting from fires or storms
• How the asset was used
• How and when the asset was discarded
• Purchase price
• Selling price
• Sale Expenses

Typical Documents
Documents that show the information above consist of sales and purchase invoices, canceled checks, financing documents, and real estate closing statements. If an organization doesn't have checks that have been canceled, it might be able to obtain payment information from account statements arranged by financial institutions. These include account statements arranged for the financial institution by a third group. Account statements are required to be clearly readable.

Here are examples showing the contents of adequate account statements. If payment is made by check, then the account statement should show the amount, payee's name, check number and date the check amount was listed on the account by the financial institution. If payment is made by electronic funds transfer, then the account statement should show the payee's name, amount transferred, and date the transfer was listed on the account by the financial institution. If payment is made by a credit card, then the account statement should show the payee's name, date of the transaction, and the amount charged to the account.

How Long Should Records Be Kept?
For federal tax purposes, an exempt organization should save records that support an item of deduction or income on a return until the law of limitations for that return runs.
The law of limitations has run when the organization cannot amend its return and the IRS is not able to evaluate additional tax any more. In general, the law of limitations runs three years after the date the return is filed or due, whatever is later. An organization might also be asked to hold on to records longer for various legal purposes, including local tax or state tax purposes.

Record Retention Periods
Record retention periods differ depending on the type of return or record.
Permanent Records: Some records are required to be kept permanently. These records consist of the determination letter recognizing tax-exempt status, the application for recognition of tax-exempt status, arranging documents (such as by-laws or articles of incorporation, with amendments) and board minutes.
Employment Tax Records: If an organization hires employees, it should save employment tax records for at least four years after the date the tax is paid or is due, whatever is later.
Records for Non-Tax Purposes: When records are not required any more for tax purposes, an organization has to save them until they are not needed any more for non-tax purposes. For example, a grantor, creditor, insurance company may ask that records be kept at a longer time than the IRScreditor, grantor, state agency or insurance company might ask that records be saved at a longer time than the IRS requires.

To read more information, see Publication 583 (Starting a Business and Keeping Records), Publication 4221-PC (Compliance Guide for 501 C3 Public Charities), and Publication 4221-PF, (Compliance Guide for 501 C3 Private Foundations).




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