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  Tax Exemption Home: Non Profit / Exemption Information: Exemption Workshop - Chapter 8 - Form 990
 

Exemption Workshop - Chapter 8 - Form 990

Most tax exempt organizations are required to complete the Form 990 series of returns and have four main reasons for their usefulness and uniqueness--

• Firstly, the Forms 990-EZ, 990, 990-PF, and 990-N are information returns and not tax returns. By definition, tax-exempt organizations usually don't pay income taxes. Such organizations file a return for the purpose of providing program and activity information. This information is utilized by the IRS to certify that these organizations are not in violation with the regulations and rules governing the tax-exempt status and are operating in a consistent manner with its stated tax-exempt purpose.

• Secondly, it is mandatory that tax-exempt organizations make their returns widely accessible for the public inspection. Organizations must, therefore, permit anyone from the public to view their Forms 990-T, 990-EZ, 990, 990-PF, and 990-N that they filed with the IRS, as well as make copies of these returns available upon request, or offer them through the Internet.
• Thirdly, with almost 40 states utilizing the IRS forms to fulfill their filing stipulations, the tax exempt organization returns are multi-jurisdictional forms.
• Lastly, while also certifying that an organization is in full cooperation with all federal and state regulations, these information returns establish accountability and transparency, which serves to bolster the relationship that funders and stakeholders may have with a tax exempt organization.

Addressing Details of Form 990 in this Chapter--
In this chapter, the following forms will be addressed: Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, Form 990, Return of Organization Exempt From Income Tax, Form 990-N, and Schedules A, B, D, and M which is part of Form 990 and which are typically the most frequently used schedules.

This chapter will particularly give explanations for key sections of the form, including why governance is important for an organization, and gives several resources to assist with a successful completion of Form 990. Resources, publications and a summary of the IRS toolkit have been included for organizations that are new to the information-return process, or that have limited resources and staff. Form 990 Instructions contain complete information regarding all the schedules found in Form 990.

In chapter 4, instructions for Form 990-T, Exempt Organizations Business Income Tax Return were outlined. However, instructions for the Form 990-PF, Return of Private Foundation, extends beyond this text's scope.

Who Must File Form 990-N, Form 990EZ or Form 990
The information return of Forms 990-N, 990-EZ or 990 must be filled annually, in most cases, by organizations that are exempt from federal income tax under section 501(a). The amount of the gross receipts of an organization for that tax year will determine which form is to be filed.
It is not mandatory for the proceeding organizations to file--
• Churches and similar organizations
• Organizations that comprise a group return
• State institutions that have an income which is apart from gross income under Code section 115 as well as other various government-affiliated organizations

How to determine the $25,000 Gross Receipt Threshold (2009)
The annual gross receipts for any organization are not usually more than $25,000 if the organization is—
• Under a year old and has received a limit of $37,500 or less in pledges or donations amid its first year
• Between 1 and 3 years old and has an average of not more than $30,000 in gross receipts during each of its initial 2 tax years, or
• Three years old or more and has an average of not more than $25,000 in gross receipts for the immediately prior 3 tax years (to include the year in which the return would be filed)

How to determine the $50,000 Gross Receipt Threshold (2010)
The annual gross receipts for any organization are not usually more than $50,000 if the organization is--
• Under a year old and has received a limit of $75,000 or less in pledges or donations amid its first year
• Between 1 and 3 years old and has an average of not more than $60,000 in gross receipts during each of its initial 2 tax years, or
• Three years old or more and has an average of not more than $50,000 in gross receipts for the immediately prior 3 tax years (to include the year for which the return would be filed)

What should be Filed
Form 990 is required to be filed by exempt organizations, unless an exempt organization's total assets and gross receipts fall below certain limits-- these exempt organizations are required to file Form 990-N or Form 990-EZ.
"Tax year" is the annual accounting period for the filing of the Form 990, whether for the fiscal year ending on the last day of any other month or the calendar year ending on December 31st.
"Total assets" are the amount that the organization reported at the end of the filing year on its balance sheet, with no liability reductions.
"Gross receipts" are defined as the gross amount received by an organization from all sources without reduction for any expenses or costs.

Thresholds for Filing
Below is an outline for the particular filing thresholds for tax years 2009 and 2010. The purpose of these thresholds is to expedite the fixed assets and receipts threshold that takes effect in tax year 2010.

In regards to the tax year of 2009, an organization is required to file Form 990 (i.e., it may not file Form 990-EZ) if it's annual gross receipts are $500,000 or more for the year or entire assets total $1.25 million or more at the end of the year. In place of Form 990, Form 990-EZ may be filed by an organization that has annual gross receipts that are less than $500,000 and has total assets under $1.25 million.

In regards to the years from 2010 and for all years to follow, Form 990 (i.e., it may not file Form 990-EZ) must be filed by an organization that has annual gross receipts of $200,000 or more or entire assets total $500,000 or more at the end of the year. In place of Form 990, Form 990-EZ may be filed by an organization that has annual gross receipts of no more than $200,000 and entire assets total no more than $500,000.

Form 990-EZ
Form 990-EZ is a simplified and concise version of Form 990 to be utilized by various smaller organizations instead of Form 990.

Form 990-N
For organizations who do not wish to file Form 990-EZ or Form 990 because their gross receipts are generally $25,000 or below are required to file the Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations that are not required to File Form 990-EZ or 990.

Starting in the tax year of 2010, an organization that has gross receipts generally $50,000 or less may file Form 990-N in place of filing Form 990-EZ or Form 990. This filing can be done without any specialized computer software or equipment and is very simple to fill out, requiring only general information such as—
• The employer identification number or EIN otherwise referred to as the Taxpayer Identification Number or TIN.
• The tax year;
• The organization's legal name and the mailing address;
• All names that may be used by the organization;
• The controlling officer's name and address;
• If held, the organization's website address;
• A confirmation of the organization's annual gross receipts to be generally at or less than the threshold ($25,000 for 2009; $50,000 for 2010); and
• If the organization is terminating or has terminated, a statement to reflect this fact (that it is going out of business).

E-filing Requirements
Form 990 is required to be filed electronically by organizations that file at least 250 returns amid the calendar year (to include information returns, employment tax, excise, and income) and have $10 million or more in entire assets. Visit www.irs.gov/efile and click on "Charities & Non-Profits" for more detailed information.

When to File
Form 990-EZ , Form 990-N or Form 990 must be filed by organizations on the 15th day of the 5th month following the end of their accounting period. As an example, for an organization with a December 31st year-end would have a due date of May 15.

Requesting an Extension of Time to File
There is no extension allowed for filing Form 990-N. However, in regards to filing Form 990-EZ or Form 990, organizations can request an automatic 3-month extension by using Form 8868, Application for Extension of Time to File an Exempt Organization Return and submitting it before or on the original due date. If organizations need to request a second 3-month extension, they can file another Form 8868 before the previous extension expires, however, a reasonable cause for the extra time needed must be shown. The IRS will not allow a filing extension to exceed 6 months.

Penalties for Late Filing or Failure to File 990 or 990-EZ Returns
Against the Organization: If an organization is required to file Form 990-EZ or Form 990 and is late, it must prove a reasonable cause for filing late; otherwise it may be charged a penalty of 5% of its gross receipts for the year or $20 per day, up to $10,000, or whichever is lesser. The penalty will accrue beginning on the due date for filing the Form 990. If Form 990-N is filed late, no penalty will be charged.

An inaccurate and incomplete return filed by an organization can also procure a penalty. If organizations file a paper filing when they were supposed to file electronically, they will be deemed to have failed to file a return.

Tax exempt organizations should be aware that if they fail to file Form 990-N, Form 990-PF, Form 990-EZ or Form 990, for 3 continuous years, the IRS will revoke its tax exempt status as of the third return's filing due date. For organizations that lose their tax exempt status, they must begin filing income tax returns, pay taxes, as well as not allowing their contributors to deduct their donations.
The organization must also apply (or reapply) for tax-exempt status reinstatement by filing Form 1023 or 1024 and pay a user fee to have its tax-exempt status reinstated.

Against Responsible Person(s): The IRS will send a letter to an organization that furnishes incorrect information or files an incomplete return, notifying the tax exempt organization that it has a fixed time in which these requirements must be fulfilled. Unless he or she can prove a reasonable cause, there will be a penalty of $10 per day on the person failing to adhere after this period expires. If several people are responsible, they are individually and jointly liable for the penalty. The penalty for all persons who fail in regards to any one return shall not surpass the maximum penalty $5,000.

Penalties for Late Filing or Failure to File 990 or 990-EZ Returns (continued)
For anyone who files fraudulent statements and returns and who willfully refuses to file, there are also fines/penalties, and/or imprisonment.
In order to avoid penalties, a tax exempt organization should follow these rules--
• Complete the applicable line items in its entirety
• Answer every question on the return, unless instructed to skip a line
• As instructed, provide required explanations
• On all lines that require an amount or any information to be reported, an entry should be made, including a zero when appropriate
• Sign the return
• File promptly by the deadline!

Form 990 Disclosure
It is required by law that organizations must furnish a copy of its filed Form 990 along with all schedules and attachments (omitting particular portions of the Schedule of Contributors, Schedule B, for some tax exempt organizations) to be made accessible to anyone on request. The IRS is also required to make the tax exempt organization's return accessible when requested.
For more details regarding this information, please refer to chapter 10 of this book.

Understanding Form 990
To assist preparers in avoiding common errors, an explanation on some of the information in the main parts of Form 990 is offered below. A separate explanation of Form 990-EZ in not included here because all 990-EZ items are also required to be on Form 990.

Form 990 Instructions
The Form 990 Instructions provide particular explanations for all of the schedules, as well as for each line item of the form. Also, to assist tax exempt organizations to complete their information returns successfully, Form 990 Instructions contains the following—
• A Sequencing List which gives step-by-step guidelines for the best route through the form
• A Glossary to define crucial terms that are used on the Form 990-EZ and Form 990
• An Appendices to improve the technical understanding of specific requirements for filing and to make clear the specialized topics
• A Compensation Table to clarify where various types of compensation is to be reported on Form 990-EZ and Form 990
• Checklist of Required Schedules to direct form preparers to the required schedules and to reveal at a glance whether the tax exempt organization has been involved in activities that warrant further investigation

Form 990 Guidance - Steps to Follow
Overview
Preparers are not able to move in a strict order from the first page to the last, but must skip around because the answers to some of the items in the first parts of the Form 990 are reliant on the information collected in the later parts. The rest of this chapter will give step-by-step instructions for the preparation basics of Form 990 and will address the preparer of the return. While reviewing this chapter, readers are urged to obtain and refer to a copy of the Form 990.

To ensure that it can continue to qualify as a public charity, before finishing the rest of Form 990, Schedule A should be completed first by a 501(c)(3) public charity. Form 990-PF should be filed in place of Form 990 if the tax exempt organization fails to qualify as a public charity (refer to the specific instructions for Schedule A later in this chapter).

A Quick Walk-Through
1. Begin with the Heading on the first page; complete items A to F as well as H(a) to M, omitting skipping item G.
2. Schedule R instructions can be reviewed to determine the organization's related organizations that are required to be listed on Schedule R.
3. Determine the organization's five highest compensated employees, officers, trustees, directors, and key employees required to be listed in Section A, Part VII of Form 990.
4. Complete all of the Parts VIII, IX, and X.
5. Complete item G from the heading on page 1.
6. Complete all of the Parts III, V, VII, and XI.
7. After reading the instructions to Schedule L, complete Schedule L, Transactions with Interested Person if this is required.
8. Complete all of Part VI.
9. Complete all of Parts I and IV.
10. Complete Schedule O as well as any other schedules that are required to be completed, as shown from the answers that you gave to the questions in Part IV of the core form. If you answered "Yes" to any answer in Part IV, this indicates that you are required to fill out the corresponding schedule or part of the schedule.
11. Lastly, return to complete Part II, Signature Block.

In most cases, the core form should be completed before the schedules are completed. Do not leave any line blank when filing out the form, unless skipping a line is expressly stated. Use Schedule O to supplement or explain any answers if there is insufficient space given for the answer. It is also necessary to round off cents to whole dollars when entering monetary values.

Step One:
The Heading
(Form 990, p.1)
This section is where you enter the basic information identifying the filing organization: its name, address, EIN, telephone number, website address, etc.
For "Name of organization," enter the organization's legal name. If the organization does business under a different name, enter that name on the next line. Skip item G until Part VIII of the core form has been completed.

Step Two:
Related Organizations
(Schedule R)
An organization can be related because it is controlled by the same persons that control the filing organization or it controls or is controlled by the filing organization. It can also be related through a supported/supporting organization relationship that is 509(a)(3). A related organization may be a disregarded entity, trust or partnership, a taxable corporation or an exempt organization. The Schedule R instructions, as well as the glossary can further define related organizations.

Step Three:
Five Highest Compensated Employees, Key Employees, Officers, Trustees, and Directors
"Highest Compensated Employees" and "Key employees" usually are employees who are not trustees, officers, or directors, but who meet certain tests with respect to high levels of compensations. Key employees also wield some authority or control over the organization.
"Officers" handle the daily operations of the organization and are defined by the state law and the organization's organizing bylaws and documents. These must include the organization's top financial official and top management official.
"Trustees" and "Directors" are the organization's governing body's voting members.
The five highest compensated employees, key employees, officers, trustees and directors are more carefully defined in Part VII instructions, as well as in the glossary.

Step Four: Parts VIII, IX, and X.
Part VIII –Statement of Revenue (p.9 of Form 990)
Part VIII, Statement of Revenue--Columns
• Column A (Total Revenue): Gross receipts from all sources of revenue are reported by filers.
• Column B (Related or Exempt Function Revenue): All revenue that comes from activities that are considerably linked to the organization's exempt purpose and any revenue that is excludable from gross income other than by reason of sections 512, 513, or 514. For example, interest on local and state bonds that is excluded from tax by section 103 is reported in column B.

Step Four: Part VIII –Statement of Revenue (Form 990, p.9) (continued)
• Column C (Unrelated Business Revenue): Filers report any business revenue from a business or trade that is non-related.
• Column D: Filers report revenue that is excluded from non-related business income by section 512, 513, or 514.
All filers are required to complete column A. All filers, excluding section 527 political organizations are also required to complete columns B, C, and D.

Part VIII, Statement of Revenue—Select line items clarified
Line 1. On Part VIII, lines 1a through 1f, it is required to report all amounts received as voluntary grants, gifts or contributions. Voluntary contributions can be comprised of any part of a payment given for which the donee did not give the full retail value to the donor. The gross amount of collected contributions from fundraisers in the tax exempt organization's name is to be reported, not the net amount after expenses. The total amount of expenses of raising contributions is reported in Part IX later on. The fair market value of a noncash contribution at the time of the donation is to be reported.
The following should not be reported in any section of Line 1, since they are not considered contributions--
• Fees or grants from foundations, governmental units, or other exempt organizations that represent a payment for a product that primarily serves to benefit the payer, payment for the use of a facility or for a service
• Payment for goods or services that came from a part of amounts that were received from fundraising solicitation
• The use of facilities, equipment or materials or donations of services
• Unreimbursed expenses of any volunteers, employees, or officers

Line 1a. (Federated Campaigns). Line 1a should be the sum of contributions that were received by way of solicitation campaigns held by federated fundraising agencies, such as a United Way organization.
Line 1b. (Membership Dues). Line 1b should contain the membership dues that serve as contributions, that is, dues that are primarily paid to support the organization rather than to receive services or goods in exchange. In figuring out if an amount is a payment for services and goods, disregard benefits that are insubstantial, such as a discounted or free admission to the tax exempt organization's events, facilities or special access to services or goods.

Step Four: Part VIII –Statement of Revenue (Form 990, p.9) (continued)
Line 1c. (Fundraising Events). Line 1c should be the amount of contributions that were received from fundraising events.

Line 1d. (Related Organizations). Line 1d should have reported the amounts contributed from organizations that are closely connected with the organization that is reporting, such as contributions given by another organization with the identical parent, a subordinate, or a parent organization. Contributions that should be included are only those that were given to assist the organization in providing a service for the overall public. Payments for products that are primarily beneficial to the payor, payments for facilities or services should not be included.

Line 1e. (Government Grants). Line 1e should have reported the grants from federal government, state or local sources or from foreign governments if the main purpose of the grant is to assist the organization in providing a service that would directly benefit the public. Grants that assist in the immediate and direct needs of the governmental unit are not to be included.

Line 1f. (Other Contributions). Line 1f should have reported every other contribution that is not already reported on lines 1a through 1e.

Line 1g. (Noncash Contributions). Line 1g should have the amount of non-cash contributions that were already stated in lines 1a through 1f. Noncash contributions are anything other than wire transfers, charges from a credit card, money orders, checks, cash and other deposits and transfers to an organization's cash account. The instructions found in Schedule M can provide further information regarding non-cash contributions.

Line 2. (Program Service Revenue). Lines 2a-2e should have the five biggest sources of program service revenue. The full amount of program service revenue from sources that was not listed on lines 2a-2e should be entered on line 2f. By the term "program services," activities that help to further the organization's exempt purposes is meant.

A business code from the Appendix J, Business Activity Codes should be entered if an amount was previously entered anywhere on lines 2a-2e.

Line 6a. (Gross Rents). Line 6a should have the sum of rental income that came from investment property. Revenue from personal property or real estate property should be designated. Income related to an exempt function should not be reported on line 6a; instead, report this income on line 2.

Step Four: Part VIII –Statement of Revenue (Form 990, p.9) (continued)
Line 8a. (Gross Income from Fundraising Events). Line 8 should have income that comes from fundraising events. Fundraising events are characterized as events that are carried on for the primary and sole purpose of generating funds to assist financing the tax exempt organization's exempt activities and should not include activities or events that further the exempt purposes of the organization. Revenue from the latter should be reported on line 2, as they are considered program services
General fundraising events include auctions, sporting events, selling merchandise from door-to-door, carnivals, concerts, banquets, bazaars and charity balls.

Example: For contributors who give at $40 or more, a tax-exempt organization will send them a book, as part of a fundraising event. The wholesale cost of the book is $8 and the retail value of the book is $16. Therefore, a contribution of $40 is recorded in this way—
• Line 1c should report $24 as a contribution
• Line 8a should report $16 as gross income from fundraising events
• Line 8b should report $8 as a direct expense
Report the indirect fundraising expenses (such as the cost to advertise for a fundraising event) on the specified line in part IX, column D, not on line 8b.

Step Four Part IX –Statement of Functional Expenses (Form 990, p.10)
Part IX, Statement of Functional Expenses
When completing Part IX, the tax exempt organization is to use its regular accounting method. Any reasonable method of allocation can be utilized if the tax exempt organization's normal accounting method doesn't include designated expenses, however, the method utilized must be documented in the tax exempt organization's records. It's also important that the tax exempt organization should not report expenses that were reported with other revenue from Part VIII, such as the cost of goods sold, gaming expenses or direct fundraising, or rental expenses.

Column A should be completed by all filers, however, columns B through D must contain designated expenses by all section 501©(3) and ©(4) tax exempt organizations.

Step Four Part IX –Statement of Functional Expenses (Form 990, p.10) (continued)
Column B: Report all expenses from program services. If lobbying expenses are related directly to exempt purposes, they must be included in column B. Unrelated business activities or trade must also be included.

Column C: Expenses that are accountable to the general operations and management of the tax exempt organization should be entered here. All lobbying expenses that were not related directly to exempt purposes are required to be reported. Among other items required to be reported in this column include expenses that are related to--
• Meetings of the Board of directors
• Staff and committee meetings, unless they directly involve a fundraising activity or program service.
• Common legal services
• Auditing and accounting
• Liability insurance
• Human resources
• Investment management

Column D: Report expenses that the tax exempt organization obtained in soliciting grants, gifts and contributions. Omitting direct expenses for fundraising events that were reported in Part VIII, line 8B, all of the tax exempt organization's expenses are required to be reported as fundraising expenses to include allocable overhead costs, incurred in conducting and fundraising events and campaigns, as well as from soliciting grants from governmental units or foundations.

Step Four: Part X –Balance Sheet (Form 990, p.11)
Part X, Balance Sheet
Though very similar, there is one major exception that differentiates the balance sheet of a for-profit entity vs. the balance sheet of a tax-exempt organization. "Equity" or "capital" accounts are maintained by the for-profit entities maintain "capital" or "equity," which trace shareholders' or partners' interests in the entity. In most cases, this does not apply to the 501(c)(3) organizations, as benefitting from net earnings is prohibited and private benefits must be insubstantial.
All tax-exempt organizations must complete Part X; a substitute balance sheet is unacceptable.

Step Four: Part X –Balance Sheet (Form 990, p.11) (continued)
The amounts from the preceding year's column B must be reported in column A. If the tax exempt organization was not required to file a Form 990 in the preceding year, it should report the amounts that the organization would have entered in column B if filling it had been required in the preceding year. The tax exempt organization should enter zeros on lines 16, 26, 33, and 34 in column A if it is in its initial year of existence. The tax exempt organization must enter zeros on lines 16, 26, 33, and 34 in column B if it is filing a final return.

Step Five:
Item G
Now, return to the heading on page 1 and complete item G, "Gross receipts." Follow the instructions for filling out which lines of Part VIII to add to figure gross receipts.

Step Six: Parts III, V, VII, and XI.
Part III –Statement of Program Service Accomplishments (Form 990, p.2)
The purpose for the statement of program service accomplishments is to allow the tax exempt organization to "tell its story," or to give an explanation of its mission, to describe tis services and programs and to list what it has accomplished. Tax exempt organizations are encouraged to be extensive in giving a full description of its program services. An administrator or staff members should be candid and open concerning the tax exempt organization's activities and operations, thus creating a considerable goodwill for their organization.

A "program service" is a major activity, generally one that is ongoing and that supports and furthers the tax exempt organization's mission.

Preparers should not feel restricted to the spaces provided in Part III. Schedule O is available to filers who wish to be particularly thorough in their description. Tax exempt organizations can use Schedule O, which is just a blank page, to include any information that was not mentioned elsewhere.

Step Six: Part V –Statements Regarding Other IRS Filings and Tax Compliance (Form 990, p.5)
Part V contains questions that serve two purposes. Firstly, these questions serve to warn the tax exempt organization that it may need to report other obligations and other forms to file besides Form 990. Secondly, these questions serve to ask if the tax exempt organization was a part of particular kinds of activities, and, if it was, did it satisfy the tax law obligations that certain activities must follow?

When completing this section, the preparer for the tax exempt organization must keep the following questions (Q) and corresponding facts in mind.

Step Six: Part V –Statements Regarding Other IRS Filings and Tax Compliance (Form 990, p.5) (continued)
Q: Was the tax exempt organization a party to a prohibited tax shelter transaction and, if so, did it file Form 8886-T? (Line 5)
Fact: It is mandatory for a tax exempt organization that is party to a prohibited tax shelter transaction to file Form 8886-T to disclose that it is a party to such transaction and to identify any other party to the transaction that it is aware of.
Q: If it is a section 501(c)(3) or other sponsoring tax exempt organization maintaining a donor advised fund or a supporting tax exempt organization, did the fund or the tax exempt organization have business holdings that were in excess? (Line 8)
Fact: Certain supporting tax exempt organizations and donor advised funds are categorized as private foundations for the purposes of the section 4943 excise tax on excess business holdings and, therefore, are required to acknowledge if they had excess business holdings at any time during the year.
Q: Did it carry out any taxable distributions under section 4966? (Line 9a)
Fact: Any distribution to an individual from a donor advised fund – whether it be a payment of compensation for services, a reimbursement, a grant, or other distribution – is subject to an excise tax under section 4966. Fund managers and sponsoring tax exempt organizations and fund managers that are liable for the tax must file Form 4720.
Q: Did it make distributions to a donor advisor, to a donor or related person under section 4967? (Line 9b)
Fact: If a tax exempt organization makes a distribution from a donor advised fund on the advice of a family member, a door advisor, a donor, or 35 percent controlled entity of any of the above persons, and the distribution indirectly or directly benefits one of such persons, section 4967 imposes a tax on the person upon whose advice the distribution was made, a fund manager for knowingly agreeing to make the distribution and the beneficiary of the distribution. Form 4720 must be filed by the persons liable for the section 4967 tax in order to pay the tax.

Step Six: Part VII – Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors (Form 990, p.7)
It should be noted that the term "current" is not used in reference to any time during the tax year in which the return is being filed. For additional information, refer to the definitions of the highest compensated employees, trustees, key employees, officers, and directors outlined in Step Three previously listed here.

Tax exempt organizations are required to list the name and title of the following--
• Every current trustee, director and officer of the organization, including those that do not receive compensation
• Key employees that are current - those persons, other than trustees, directors and officers, who: (a) were within that group of the tax exempt organization's top 20 highest paid persons for the year who satisfied both the responsibility test and the $150,000 test; (b) had or shared organization-wide influence or control similar to that of an trustee, director or officer, or had authority or control or managed over at least 10 percent of the organization's activities (the "responsibility test"); and (c) had reportable compensation exceeding $150,000 for the calendar year ending within or with the tax exempt organization's tax year (the "$150,000 test").
• The five highest compensated current employees, excluding persons already identified as a key employee, trustee, director or officer and excluding any employee who received $100,000 or less of reportable compensation from the organization or any related organization. To verify the five highest compensated employees, determine just the sum of compensation paid in the calendar year ending with or within the tax exempt organization's tax year.
• Any highest compensated employee, key employee, or former officer who received over $100,000 of reportable compensation in the calendar year ending with or within the tax exempt organization's tax year from the organization or any related organization, and
• Any trustee or former director who received over $10,000 of reportable compensation for services that were provided in that person's former position as trustee or director from the organization or any related organization during the calendar year ending with or within the tax exempt organization's tax year. The term "former" alludes specifically to those individuals that the tax exempt organization reported (or should have reported) in any of the previously mentioned categories above in one or more of its information returns for the prior 5 years.

Step Six: Part VII – Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors (Form 990, p.7) (continued)
The tax exempt organization is required to include the reportable compensation for each person listed in section A. The "reportable compensation" of other employees and officers is usually the sum that was reported in box 5 of Form W-2. The "reportable compensation" of trustees and directors is usually the amount that was reported in box 7 of Form 1099-MISC.

It is required that all tax exempt organizations report compensation for the calendar year ending with or within its fiscal year, and must use the sums that were reported on Form W-2 or Form 1099-MISC for that calendar year. Additionally, tax exempt organizations are required to report an estimate of "other compensation," together with compensation that was deferred and was not currently reportable on Form W-2 or Form 1099-MISC and nontaxable benefits such as various nontaxable fringe benefits, retirement plan benefits, health benefits, and retirement plan benefits, not to include particular working condition and the de minimis fringe benefits.

Part VII has instructions that includes a table explaining where to report and whether to report items of compensation and benefits in Schedule J and in Part VII, section A.

In Section B, it is mandatory for tax exempt organizations to list the five highest compensated independent contractors that received over $100,000 in compensation for services, to explain the services that were provided and to state the amount paid. "Independent contractors" can be individuals who are not employees, other entities or corporations, and can include accountants, lawyers, management companies, and professional fundraisers that perform services to the tax exempt organization.

Step Six: Part XI – Financial Statements and Reporting (Form 990, p.11)
Part XI, Financial Statements and Reporting
Part XI is short and straightforward. Its primary purpose is to capture the organization's financial oversight process. Specifically, it asks the organization to disclose the extent to which it used an independent accountant for both review and audit of its financial statements.
An organization with substantial assets or revenue should consider obtaining an audit of its financial statements by an independent auditor. It should also consider establishing an independent audit committee to select the independent auditor and review its performance.

Step Six: Part XI – Financial Statements and Reporting (Form 990, p.11)
Schedule L—Transactions with Interested Persons
If required, after reading the instructions to Schedule L, complete Schedule L. To affirm financial transparency for purposes of public trust, as well as for filing, it is necessary for preparers to read the instructions for Schedule L in determining if any member of the tax exempt organization's governing board participated, indirectly or directly, in any transaction with the organization- or from an organization that is related- that can be reported on Schedule L, Transactions with Interested Persons. Such transactions include the following--
• Excess benefit transactions involving a 501(c)(4) organization or a 501(c)(3) public charity and a disqualified person
• Loans that any type of filing tax exempt organization receives from, or makes to, an "interested person" (which includes former and current highest compensated employees, key employees, trustees, officers and directors)
• Grants or similar economic assistance furnished by a tax exempt organization to any interested person
• Indirect or Direct business transactions between any interested person (to include current and former key employees, trustees, directors, officers, their family members, and entities they own or control) and a tax exempt organization during the tax year

Schedule L will need to be completed before Part VI of the core form is begun if you think that any member of the tax exempt organization's governing body was a part of a financial transaction that should be reported. At the least, you should be knowledgeable concerning the number of all governing body members that were involved in transactions that are reportable on Schedule L so that you are able to answer line 1b of Part VI.

Step Eight: Part VI – Governance, Management and Disclosure Overview (Form 990, p.6)
As was previously stated, the questions in Part VI show the interest of the IRS's in becoming aware of the practices and governance policies of tax exempt organizations. The IRS believes that a tax exempt organization with a dedicated and knowledgeable management team and governing body, a clearly stated mission, and sound financial and managerial practices is best equipped to succeed in its mission, safeguard its assets and cooperate with the tax laws.

The Tax exempt organization and, particularly, its governing body- which is responsible for affirming that the tax exempt organization's activities are furthering tax-exempt purposes and accomplishing organizational goals-- is encouraged to acquaint and review itself with the organization's Form 990 before filing this form because Form 990 is one of the main ways that the public and the IRS learn about the organization and its activities.

Part VI is split up into three sections, which pictures the organization's policies, management structure, and disclosure practices.

Step Eight: Part VI – Governance, Management and Disclosure, Section A (Form 990, p.6)
The questions in Section A regard the governing body. The governing body is defined as the group of persons authorized under state law that have the most control of the tax exempt organization. On average, the governing body of a trust is its trustees and the governing body of an association or a corporation is its board of directors. Directors are encouraged to stay informed regarding its activities, actively supervise the management of their organization, and avoid situations or actions that are incompatible with an obligation to act solely in the best interests of the tax exempt organization.

The amount of voting members that are on the governing body of the tax exempt organization is to be answered on Line 1 (e.g., trustee, director). Another question asked here is how many voting members are independent. By the term "independent," it is meant the director: (1) was not compensated as an employee or officer of the tax exempt organization or of a related organization; (2) total compensation or other payments more than $10,000 from the tax exempt organization and related organizations as an independent contractor, other than reasonable compensation for services provided in his or her capacity as a director were not received; and (3) was not a part of (nor were any of the director's family members a part of) a transaction with the tax exempt organization or a related organization that can be reported on Schedule L (or that could be reported on Schedule L if filed by the related organization).

Step Eight: Part VI – Governance, Management and Disclosure, Section A (Form 990, p.6), (continued)
A governing board should mainly consist of independent members, no matter its size; it should not be controlled by individuals who have a business or family relationship. Independent board members are necessary for the reason that their presence increases the chances for decisions to be made in the best interest of the community it serves and for the organization.

A member is considered independent if he or she:
• Has a total compensation of $10,000 and under
• Is not involved in the Schedule L-reportable transaction
• Is not compensated as officer/employee

Section A consists of other questions that inquire about family and business relationships between and among the organization's key employees, trustees, directors and officers, if and what control is used over the organization by governing members, and if the tax exempt organization simultaneously documented its committee and Board and actions and meetings.

Transparency is a crucial part of governance, which contains public disclosure of internal fraud or criminal activity. Line 5 questions the tax exempt organization if at any time throughout the reporting year, the organization became aware of a material diversion of its assets, such as by embezzlement or fraud, whether such diversion occurred during the year or earlier. A diversion is determined to be material if the gross value of all the diversions (not considering insurance, restitution, or similar recoveries) discovered at the time of the organization's tax year goes beyond the lesser of: (1) $250,000; (2) 5 percent of the tax exempt organization's gross receipts for its total tax year; or (3) 5 percent of the tax exempt organization's total assets by the end of its tax year.

Step Eight: Part VI – Governance, Management and Disclosure Section B (Form 990, p.6)
Section B inquires whether the tax exempt organization has adopted certain governance procedures or policies, such as a whistleblower policy, a conflicts of interest policy, a joint venture policy, a document retention and destruction policy, and a process for establishing the executive compensation. The IRS strongly encourages tax exempt organizations to consider the value of incurring these or similar procedures and policies for the purpose of lessening the non-compliance risk and for promoting compliance with federal tax-exempt laws, even though adopting such policies is not mandatory

Step Eight:
Part VI – Governance, Management and Disclosure Section C (Form 990, p.6)
Section C concerns organizational disclosure. Particularly, it requests that tax exempt organizations give an explanation regarding what information organizations make accessible to the public and how they make it accessible.

A tax exempt organization must make a copy of its three most up-to-date Form 990 annual information returns as well as its exemption application (Form 1023 or 1024) accessible for public examination at its main office and at its district or regional offices during normal business hours and must make these forms available for the public (e.g., on the website of the organization) and supply copies of such forms upon request.

It is recommended that tax exempt organizations should establish procedures to affirm that such forms are made available to the public upon request. For a more detailed explanation concerning public inspection requirements, consult Appendix D of the Instructions. Chapter 10 in this book offers more information on disclosure, as well.

Step Nine: Parts I and IV. Part I – Summary (Form 990, p.1)
Although found at the beginning of the form, the summary should be one of the final parts of the core form that is to be completed for the reason that it requires that you should produce key governance, operational, and financial information from other parts of the form as well as from years previous.
Part IV, Checklist of Required Schedules must be completed in order to figure out which schedules or parts of schedules that must be completed.

Step Ten: Schedules to Complete
After answering questions in Part IV, complete any schedules or parts of schedules you need to complete.

Step Eleven: Part II, Signature
(Form 990, p. 1)
Complete the Part II of Form 990, Signature Block.

Schedule A –
Public Support and Charity Status
What is Schedule A? Schedule A collects information regarding a tax exempt organization's public support and charity status.

Who is required to file? For tax exempt organizations that are a section 501(c)(3) organization and that file a Form 990-EZ or Form 990, a Schedule A must be filed, also. Schedule A should not be filed by tax exempt organizations that are not 501(c)(3) organizations.

How is Schedule A to be completed? Schedule A is comprised of two separate support schedules: the support schedule in Part II is used for the purpose of computing the public support of publicly-supported charities which are publicly supported under sections 509(a)(1) & 170(b)(1)(A)(vi); the support schedule in Part III is used for the purpose of used to computing the public support of charities that are publicly-supported under section 509(a)(2). Both of these support schedules emphasizes a 5-year testing period that includes the present tax year.
To complete Schedule A, the same accounting method that was used to finish the core form, i.e., the plan that was checked in Part XI, line 1 of the core form, whether accrual or cash, must be used.

Schedule B – Schedule of Contributors
What is schedule B? Schedule B is employed in providing information on certain contributors of contributions that the tax exempt organization reported on line 1 of Form 990-EZ or 990.

Who are to use Schedule B? Unless tax exempt organizations determine that they do not meet the filing requirements of Schedule B by checking the proper box in the heading of their Form 990-EZ or 990, they are required to include a completed Schedule B with their Form 990-EZ or 990.

A tax exempt organization is obligated to file Schedule B if it is--
• A section 501(c)(3) organization that received one or more contributions that were above the greater of $5,000 or 2 percent of the amount on line 1h of Form 990, Part VIII from any one contributor and that met the 33 ⅓ percent support test
•A section 501(c)(3) organization received one or more contributions of $5,000 or more from any one contributor and that that did not meet the 33 ⅓ percent support test
•A section 501(c)(7), (8), or (10) organization that received during the tax year (a) contributions of $5,000 or more not solely for such purposes from any one contributor, or (b) contributions of any amount for use solely for charitable, literary, religious, or educational purposes, or for prevention of cruelty to children or animals
• Any other organization that, during the year, received a contribution of $5,000 or more from any one contributor

How is Schedule B to be completed? Part I requires the name and address of the contributor, the total amount of the contribution, and the type of contribution to be reported. Descriptions of noncash contributions are to be reported, as well as a fair market value stated, in Part II.

When making its Form 990 available for public examination, a tax exempt organization may decide not to give the names and addresses of contributors that were listed on Schedule B; however, this rule does not apply to section 527 political organizations.

Contributor
"Contributor" includes individuals, exempt organizations, trusts, associations, partnerships, corporations and fiduciaries.

Schedule D –
Supplemental Financial Statements
Schedule D is a group of financial statements to enhance the financial reporting on Part X of the core form. Some of the statements satisfy existing or new reporting requirements for endowment funds, escrow accounts, conservation easements, donor advised funds, and museum and art collections. Others had previously been solicited as attachments whose layouts were left mainly to each filer's discretion. Schedule D places these statements in one schedule and provides each a consistent format.

Schedule M –
Non-Cash Contributions
Schedule M is solely devoted to the reporting of non-cash contributions. This schedule is required to be completed by any tax exempt organization that reported more than $25,000 of total non-cash contributions during the year in Part VIII, line 1g of the core form, or that received contributions of historical treasures, art, or qualified conservation contributions. All non-cash contributions are to be included, not just charitable contributions deductible under section 170 of the Code, that were made to any tax-organizations, not just those organizations that are qualified to receive tax-deductible contributions.

It should be noted that Schedule M is employed to report the various non-cash contributions that were received during the year. There are 24 various types of property listed on separate lines in Part I of the schedule with added lines to include the types that are not listed.

Additional Resources
To locate additional resources such as the Checklist of Required Schedules, refer to the "For More Information" section on into this guide. This checklist will offer assistance to successfully complete Form 990.

Resources –
IRS.gov/EO
Besides Form 990 instructions being a great source of information when completing the Form 990, other information is available to assist you in ensuring that the form is completed properly, there are many other resources available to help ensure your form is properly completed. To see a full list of Form 990 Resources and tools that apply to exempt organizations, visit www.IRS.gov/charities.html/.

Case Study
A case study giving a description of hypothetical organization "EO for Disaster Relief," otherwise EODR, is accessible at www.irs.gov/charities/article/0,,id=210368,00.html. A series of seven brief videos describe how facts are translated into a completed Form 990. Also available is the fully completed form 990.

EO Life Cycle
A public charity, while it exists, has many interactions with the IRS – from filing an application for tax-exemption status recognition, to filing the necessary yearly information returns, to adjusting its purpose and mission. The IRS gives information, forms, guides, explanations, and publications on all of these subjects – they are accessible by visiting http://www.irs.gov/charities.html/. The online example gives a user-friendly way of linking to documents that the majority of charities will need as they continue though the phases of their "life cycle."

EO Update
In order to obtain Exempt Organization's EO Update, a regular newsletter containing information for tax-exempt organizations and tax practitioners who represent them is provided at www.irs.gov/eo and click on "EO Newsletter."

StayExempt
Website
StayExempt.irs.gov is an educational "micro-site" provided for tax-exempt organizations. The site provides a "Virtual Workshop," a glossary, links to related publications and forms, 15 mini-courses, and a full Frequently Asked Questions section.

Virtual Workshop
The Virtual Workshop guides you through a set of five interactive lessons touching on tax basics for 501(c)(3) organizations. You can learn, and test yourself regarding the IRS regulations and rules.

Mini-Courses
A variety of mini-courses deal with additional tax topics for the exempt organization. Whether you desire to deduct charitable contributions, apply for tax-exempt status, or fill out Form 990, you'll find the answers here.

For More Information
Form 990, Return of Organization Exempt from Income Tax
Form 990-EZ, Short Form Return of Organization Exempt from Income Tax
Form 990, Part IV, Checklist of Required Schedules
Instructions for Form 990 or 990-EZ
Schedule A, Supplementary Information – Organizations Exempt Under Section 501(c)(3)
Schedule B, Schedule of Contributors
Schedule D, Supplemental Financial Statements
Schedule M, Non-Cash Contributions
Form 990N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations not required to File Form 990 or 990-EZ
Form 8868, Application for Extension of Time to File an Exempt Organization Return

The following article gives extra information on Form 990, Schedule A, and Schedule B: www.irs.gov/pub/irs-tege/eotopich03.pdf/.


 

 

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