Ten Reasons for Nonprofits to Keep Scrupulous Records
Ten Smart Reasons for your Nonprofit to Keep Scrupulous Records
To qualify as tax-exempt entities, nonprofit organizations must comply with certain federal income tax laws. And to prove compliance, you must maintain records, but there is no required recordkeeping system. As a matter of fact, your organization can choose any system that suits its activities and clearly shows your income and expenses.
Here are 10 reasons why it’s prudent to keep scrupulous financial records for more than just tax purposes.
1. To help monitor programs.
Records can show whether programs are successful or improving and what changes an organization may need to make. In fact, good records management can be a contributing factor to the success of a program. Historical context can be valuable for documenting the growth of your nonprofit for storytelling, celebrating milestones, and preserving organizational memory.
2. To assist in preparing financial statements.
It’s essential to maintain revenue and expense statements and balance sheets to prepare accurate financial statements that can be used when working with banks, creditors, contributors, and funding organizations.
3. To prepare tax returns.
Your organization’s records must substantiate income, expenses, and credits reported on Form 990 series and other tax returns. These are generally the same records needed to monitor programs and prepare financial statements. Also, keep in mind that books and records of exempt organizations must be available for the IRS to inspect. You may be asked to explain items reported or missing from returns. Careful record-keeping speeds up IRS examinations and usually results in better outcomes.
4. To identify where receipts came from.
Your organization may receive money or property from many sources. To identify these sources, you need good records and need to be able to separate program from non-program receipts, taxable from non-taxable income, and to complete the organization’s Form 990. Part of that form requires your organization to show how much support you receive from specific contributors.
5. To ensure transparency and accountability.
Clear, detailed records ensure that the nonprofit’s financial activities are transparent to stakeholders, including donors, board members, volunteers, and the public. All of whom foster trust and confidence in a nonprofit’s operations.
6. To record deductible expenses for Unrelated Business Income Tax (UBIT) purposes.
If you don’t record expenses when they occur, your organization may overlook deductible expenses when it prepares its UBIT return.
7. To strengthen donor relationships.
Maintaining records of donor interactions, contributions, and acknowledgements helps nonprofit organizations personalize communications, express gratitude, and build trust. Accurate records are crucial for donors to receive the appropriate tax benefits.
8. To apply for grant funding
When applying for grants, nonprofit organizations can provide evidence of their activities, outcomes, and financial stability.
9. To evaluate performance.
Proper documentation allows nonprofit organizations to assess their performance and impact. By tracking outcomes and comparing them to goals, organizations can refine strategies for achieving their mission. Accurate records streamline operations by reducing confusion, minimizing duplication of efforts, and facilitating communication among team members.
10. To improve board governance.
Records of board meetings, decisions, and policies aid in effective governance. Boards can review past actions, make informed decisions, and ensure alignment with the organization’s mission. Should key staff, board members, or leaders transition out of the organization, comprehensive records ease the transition process by providing insights into ongoing projects, relationships, and operational details.
Overall, maintaining scrupulous records is essential for the successful operation, growth, and long-term sustainability of nonprofit organizations. For more information, review the IRS Compliance Guide for 501(c)(3) Tax-Exempt Organizations.
Questions about improving your nonprofit’s operations? Brady Ware Nonprofit Advisors want to help you fulfill your mission with financial health and compliance services and a network of nonprofit consultants who specialize in strategic decision-making.
Questions?
Jacob manages a variety of accounting, audit, review, and compilation engagements for the firm’s Columbus, Ohio, clients in numerous industries, including Nonprofit, Retail, Construction, and Auto Dealers. He has an extensive background in auditing nonprofit organizations, as well as experience in auditing employee benefit plans.