Read the award terms first
Before spending, identify the approved budget, the allowable and unallowable costs, the spending period, the reporting dates, any matching requirement and the record retention period. Put the key terms on one page. If something is unclear, ask the funder in writing and keep the reply.
Terms that include audit rights or return of unspent funds change how careful you need to be.
Keep grant money visible
Where practical, receive grant funds in a separate bank account or at least track them with a dedicated class, project or account in your software. Record the receipt as grant income or a liability until conditions are met, depending on the terms and the advice of your accountant. Do not let grant money disappear into the general account.
Tag each expense paid with grant funds with the grant name and the budget line it supports.
Document each spending item
Keep the invoice, proof of payment, and a note explaining how the expense meets the grant purpose. For payroll charged to a grant, keep time records that show the share of each person's time. For equipment, record the asset and its use. Records should be organized by budget line so a reviewer can follow them.
Avoid using grant funds for items outside the approved budget without written approval.
Reporting to the funder
Prepare periodic reports from your books using the funder's template. Reconcile the report to the ledger and to the bank statement. Keep a copy of what you submitted and any acknowledgments. If your actual spending deviates from the budget, get approval for the change before spending.
Meet deadlines. Late reports can delay payments or affect future funding.
Taxes and record retention
Whether grant income is taxable, and how related expenses are treated, depends on the type of grant and the recipient. Ask your preparer early so that your tracking supports the answer. Funding agreements often require holding records for several years after the grant closes, which may be longer than your normal period.
Keep the whole file together: application, award letter, budget, correspondence, ledger reports, supporting documents and final report.
A budget-to-actual tracker
Create a simple table with the approved budget lines in the first column, the approved amount in the second, spending to date in the third, and remaining balance in the fourth. Update it monthly from your ledger. A line that is nearly spent early in the grant period is a signal to talk to the funder before you run over.
Share the tracker with the person who writes the grant reports. When the same numbers feed both the books and the report, they will agree.
Common questions
Can I pay myself from a grant?
Only if the terms allow it and it is documented as required. Read the award.
What if I do not spend all the grant?
The agreement tells you whether to return it or whether it may be carried over. Ask the funder.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.