What Type of Record Keeping is Required?
As a New Mexico Nonprofit attorney my clients wonder what nonprofit recording keeping requirements there are for a tax exempt organizations. Specifically there is not one type of record keeping that is required, but each nonprofit organization is subject to federal and state laws if they do not maintain their records well. The way records are kept by each organization is totally up to them, but they are responsible for the information when annual financial reports are due.
Transactions like purchases, employee taxes, expenses, and receipts should be kept indefinitely so those records can be reviewed and audited if need be.
Accounting Times and Methods
There are many legal timelines that every public charity must know and abide by. Here are a few examples of these types of tax cycles:
Calendar tax year – The calendar tax year period is 12 consecutive months, usually from January 1st until December 31st
Fiscal tax year – this is the tax year over 12 consecutive months. It ends on the last day of every month other than December.
There are two types of accounting methods that nonprofit organizations can choose to follow. They must be followed strictly and this includes all reporting and filing rules. The first tax return decides the method that the organization will use to calculate its financial health.
Actual method – using the actual method allows nonprofit organizations to report only the income during the tax year. Expenses, whether they are paid or not, are usually recorded in the year they happened.
Cash method – using the cash method will allow a nonprofit to report income during a specific tax year. Deductions are made in the year in which the expenses are paid.
Supporting Documents for Taxes
There are a number of supporting documents that nonprofits need to record and keep as well. Sales, payroll, and purchase records should be kept in good order. Additionally, sales slips, grant award documentation, applications, and other support documents should be kept despite their lack of immediately apparant relevance.
Gross receipts are documents showing the amount of money received from different donors and contributors. Bank deposit slips, credit card information, correspondence, and invoices are all examples of gross receipts that need to be recorded and maintained.
Every nonprofit must maintain proper records of purchases that are made throughout the fiscal year. This can include checks and all receipts from nonprofit purchases. All information, including how much was paid, should be on the receipts so that the proper authorities can scrutinize them in the event of an audit or examination.
Every nonprofit organization will have expenses. These must be recorded in a number of ways in order to remain valid. First, a reason for the expense must eb offered. Second, the cost of the expense must also be recorded. Both of these two things can give auditors an understanding of expenses and whether they break tax exempt rules.
Employee compensation and tax information are also necessary for every nonprofit organization.
Assets & Liabilities
Assets and liabilities are also used to evaluate the nonprofit organization and their tax situation. If a charity owns a building then that is different from a nonprofit that rents. Records about assets should explain the following information:
- Time period the asset was acquired
- How did the nonprofit acquire the asset?
- What was the purchase price of the asset?
- How is/was the asset being used?
- Was any loan used to acquire the asset?
- Debt list documents
- How much did it cost to improve the asset?
- Were there casualty losses that require deductions?
- Any depreciation deductions?
- When was the asset disposed of?
- How was the asset disposed?
- What was the selling price?
- What were the additional expenses for the sale?
Financial documents, sales invoices, and real estate documents can all help to record this type of information. A good accountant will be able to make sure all of this information is in order.
How Long to Keep Records?
All records should be kept by a nonprofit organization until the statute of limitations is up. This means that any documents needed for federal tax purposes should be kept safely until the tax year has long past, treating three years as a good rule of thumb for document retention. Even then it is best to keep records indefinitely. However, usually after three years have elapsed the records can be relatively safely removed.
Record and Document Retention
For different types of returns and records there is a different record retention period associated with it. This means it is vital to have corporate or tax legal professionals assist you in setting up your annual document destruction calendar.
Permanent records – Some records need to be kept permanently by nonprofit organizations. Articles of incorporation and the letters asking for and being granted tax exempt status should both be kept indefinitely, for example.
Employment tax records – Employee compensation tax documents should be kept by nonprofit organizations for at least four years after taxes are due. This is the basic rule of thumb for employment records.
Records for non-tax purposes – Some records are not needed for tax reasons at all. Insurance documents are one example of a non-tax document that should be kept until they are no longer needed for their purposes.
Reporting Changes to a Nonprofit Organization
Changes on the Annual Information Return
If a nonprofit organization needs to change information then it can be done through the Exempt Organizations (EO) Determinations Office. Additionally, the Form 990 (talked about in our article regarding nonprofit taxes and reporting) can include new address, name, or any type of changes within the charity.
If changes are made in a nonprofit organization, then make sure to include all documentation of this. That way legal authorities can verify the change. Otherwise there may be tax problems that stem from a lack of due diligence.
Determination Letters and Private Letter Ruling Requests
After getting an address or name change from the EO Determinations office, a nonprofit should ask for an updated tax exemption notice. However, if the name of the organization has changed, then they should be issued a new determination letter.
In addition to the name and address changes, a nonprofit can also request a change to the tax exemption status. If there is uncertainty, the nonprofit organization should request a private letter ruling. If the nonprofit requests a letter before filing for the yearly return, then the IRS can offer a ruling. If you find yourself or your organization in this scenario, it is best to speak with a tax or corporate legal professional about your best options.
For any additional questions be sure to contact one of our expert New Mexico Nonprofit Formation Lawyers.