“Where is that important document? I’m pretty sure we kept it…” If this sounds all too familiar, you’re not alone. Most organizations struggle with the burden of maintaining all the critical documents they will need to file taxes or complete an audit. And, of course, wondering whether or not you should hold on to a particular record only adds to the difficulty. The new year has just begun, so now is a perfect time to finally get those files in order. This time, though, you’ll have the advantage of knowing exactly what you need to keep.
Here are the records your business or nonprofit organization should be tracking throughout the year for tax purposes:
- Balance sheet, income statement, trial balance and general ledger
- Investment statements and reconciliations
Some kinds of tax-related records should stay in your files for a period of seven years:
- Forms W-2, W-3, 1099 and 1096
- Bank statements and reconciliations
- Cash receipts and cash disbursement support
Other types of records have a recommended retention period based on their nature:
- Keep documents related to capital expenditures, intangibles and goodwill as long as the items/activities they describe are in service or valid.
- Keep all contracts and agreements (i.e. leases, awards, professional services, etc.) as long as they are valid. Retain these records for years still subject to audit even if the agreement has expired.
- Keep records of endowments forever. Those related to restricted donations and revenues should be maintained as long as the restrictions are valid or in place.
- Organizational documents such as by-laws, articles of incorporation and exemption determinations should also be maintained permanently. If these documents are updated, continue to keep the older documents in your files for a few years after the change.
- Nonprofits that receive federal grants or awards should keep all related documents for up to six years after the end of the award period to which the funds apply. This includes grant/award records, subrecipient information, grant reporting and all other relevant documents.
For an audit, you’ll need to have the same records you’ve retained for tax purposes. In addition, you will need to have on hand:
- Payroll records for the past seven years
- Board minutes
- Internal financial records
Finally, you should be sure to keep audit reports on a permanent basis.
Keeping clear and well-organized records of all your financial activities requires dedication, but having these documents easily accessible will make for a much smoother process once it’s time to file taxes or prepare for an audit. A systematic approach is your best bet, with periodic reviews to make sure all documents are in place.
You can maintain these critical records digitally or on paper – whichever way works best for your organization. However, it is unwise to rely on a single copy in either system. If yours is a paperless office, you should keep digital copies in multiple places, including at least one that is offsite. The same goes for paper files; dealing with a natural disaster or other calamitous event becomes far more difficult when you’ve lost key data.
For some organizations, the preferred method of keeping documents involves hard copy records that are converted to digital format after a few years. While this can be a viable solution that minimizes long-term paper buildup, it’s important to ensure the specific data you need is easy to locate and extract later.
One final note of caution: Don’t rely on only one person to be the master of the records. You should have several people within the organization who know how and where all important documents are stored and can access them when needed. This will prevent your audit from grinding to a halt due to a poorly timed family vacation or job change and will allow for stronger internal controls.
Turn to the accounting and advisory professionals at Halt, Buzas & Powell for effective strategies to manage these documents as well as the numbers behind them. We’re here to support you through taxes, audits and the everyday challenges of helping your organization thrive.