November 15 is right around the corner, and for many tax-exempt organizations that means it’s time to prepare and file the IRS Form 990: Return of Organization Exempt from Income Tax.
If you have started a new organization, have grown in size or want to make your form a more powerful representation of your organization, now is a good time for a refresher on the basics, purpose and best practices of completing the Form 990.
Form 990 Basics
Despite their “tax-exempt” status, most nonprofit organizations are required to file a Form 990 tax return to provide information required under Internal Revenue Code (“IRC”) section 6033. This filing requirement applies to:
- Organizations exempt from income tax under IRS section 501(a) that are either described in section 501(c)(3) (other than private foundations) or organizations described in other 501(c) subsections
- Non-exempt charitable trusts
- Section 527 political organizations
A gross receipts test determines which Form 990 your organization must file:
- Form 990N – gross receipts of $50,000 or less
- Form 990-EZ – gross receipts less than $200,000 and total assets at the end of the tax year less than $500,000
- Form 990-T – unrelated business income greater than $1,000
- Form 990 – Gross receipts equal to or greater than $200,000 or total assets equal to or greater than $500,000 at the end of the tax year
Purpose of the Form 990
The Form 990 is intended to provide the government and the public with an overview of the organization’s activities and spending. The information is used by government entities, donors and the public to make educated decisions and conclusions about the organization’s financial position, governance activities and program effectiveness.
Unlike the tax returns of private corporations, Form 990s are generally available for public inspection as required by IRC section 6104. Charity watchdogs like Guidestar and Charity Navigator and state charity websites are common repositories for convenient access to view the forms.
Tips for Telling Your Nonprofit’s Story
While the Form 990 portrays some of your organization’s most intimate details, it is also a welcome opportunity to make a positive impression on donors and potential donors. The nature of the form offers flexibility to maximize and highlight key information, while addressing information that might otherwise raise “red flags” to the public, IRS or other readers.
When completing your Form 990, pay close attention to the following areas to put your organization’s best foot forward:
Part III: Program Service Accomplishments
In this section of the form, you will disclose and describe any new program service activities. You will also provide information regarding your largest programs. These descriptions should be specific and highlight successes throughout the year – both in qualitative and quantitative terms. Use this opportunity to demonstrate the impact a new program has had on its clients or community.
Part V: Statements Regarding Other IRS Filings and Tax Compliance
Review this section closely each year, even if you don’t think there have been any changes. Provide further explanation in Schedule O for any information that may be viewed as unusual.
Part VI: Governance, Management, and Disclosure
Consider the amount on Line 1a (total number of voting board members at the end of the tax year) in relation to the amount on Line 1b (total number of voting board members who are independent). Ideally, these numbers should be the same, reflecting complete independence of board members from the organization itself. Proactively and liberally apply the narrative descriptions in Schedule O to enhance your responses in this section.
Part VII: Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors
Consider adding date disclosures for start/end dates of all listed individuals. As you provide more information in addition to their compensation, find ways to address the following questions:
- How is your existing list of board members helping to recruit new board members?
- What does the compensation of your top management tell a potential employee?
- Is there substantial independent oversight of the organization?
Part VIII: Statement of Revenue
Understandably, your organization’s stewardship of donations and other revenue is going to be one of the most scrutinized aspects of your Form 990. Remain transparent about the revenue your organization has received and clearly demonstrate how the organization has used those dollars to achieve tangible outcomes.
On Line 2, Program Service Revenue, be as descriptive as possible regarding program service activity descriptions. Avoid using vague “program revenue” descriptions.
Be as transparent as possible on lines 1-10 when disclosing the proper type of revenue. On Line 11, Miscellaneous Revenue, avoid disguising potential unrelated business income or other easily classified income as “Miscellaneous” or “Other.”
Schedule F: Statement of Activities Outside the United States
Be sure to provide clarity on the size and scope of activities outside the U.S., as well as their correlation to the organization’s mission.
Schedule G: Supplemental Information Regarding Fundraising or Gaming Activities
Relationships with professional fundraisers must be disclosed here. Proactively address professional fundraisers who could be viewed as retaining “too much” of the funds they helped to raise. The best practice is for a professional fundraiser to retain no more than 10-15%. Your organization should never hire a professional fundraiser without a written agreement in place.
The Schedule G disclosures often raise the question: How “effective” are special event fundraisers? To address this concern, carve out the contribution revenue component in Part II, Line 2 and do not “zero out” special event net income.
Schedule J: Compensation Information
The purpose of this section is to provide transparency around highly compensated employees and expose potential excess compensation. When completing this section, try to anticipate the questions and concerns that may arise and add disclosures as necessary to respond to any appearance of excess compensation. Be cognizant of the responses in Part I that may appear excessive or unnecessary.
Schedule L: Transactions with Interested Persons
When reporting related party transactions between individuals, be mindful of the dollar amounts reported here. Think about how they might be perceived by potential donors, and ensure disclosures are thorough and accurate.
Before finalizing your organization’s Form 990, you will want to review your responses carefully and thoughtfully and ask yourself the following questions:
Are my responses consistent throughout the Form?
Any contradictions or inconsistencies could undermine the reliability of the entire document in a donor’s mind.
Have I highlighted the importance of the board’s role in the organization?
Be sure you have included the board governance and oversight measures in place to protect this important role.
Do our yes/no responses provide an accurate description of the organization?
Consult with your CPA to evaluate these answers and help you identify additional Schedule O disclosures that can provide further insight into the yes/no responses.
Is our Form 990 an effective marketing tool to attract potential donors?
Do not view your Form 990 as just another required filing. By writing a current, clear and descriptive narrative that is highly consistent with your organization’s mission, this filing can be an effective and powerful tool in your fundraising machine.
Vanessa Punzo, CPA is a Manager in Grassi’s Not-for-Profit Practice. She can be reached at firstname.lastname@example.org or 516.918.5905.