FORM 990, EXEMPT ORGANIZATION RETURN (COOPERATIVES)

CHAPTER 26 - FORM 990, EXEMPT ORGANIZATION RETURN (COOPERATIVES)

Filing Requirements

Utility cooperatives exempt under IRC 501(c)(12) that receive at least 85% of their gross income from members for the sole purpose of meeting losses and expenses are exempt from federal income tax.

Form 990, an annual informational return, is filed by these exempt organizations and no tax liability is calculated. When gross income from unrelated business income exceeds $1,000, a Form 990-T must be filed (see the Form 990-T chapter).

Due Date and Extension

Form 990 is due May 15^th for calendar year organizations or the 15^th day of the 5^th month following the fiscal year end. The return is filed with the IRS Service Center in Ogden, Utah. An automatic 6 month extension of time to file can be obtained by filing Form 8868 before the due date.

Late Filing Penalty

A late filing penalty of $20 per day, not to exceed the lesser of $10,000 or 5% of the organization's gross receipts, may be charged when a return is filed late unless a reasonable cause for the lateness can be shown. Organizations with annual gross receipts exceeding $1 million are subject to a penalty of $100 for each day the failure continues with a maximum penalty of $50,000. The penalty may also be charged for an incomplete return, such as by failing to complete a required line item or required part of a schedule.

Public Inspection

IRS regulations require exempt organizations to make their application for exemption and their Form 990 as it was originally filed available for inspection at their principal, regional and district offices. Exempt organizations must respond to requests made in person or in writing and must make available all or any part of the documents requested by individuals. Each annual information return (Form 990) must be available for inspection for 3 years from the return’s due date. The disclosure rules apply to the salaries, fringe benefits, and retirement benefits paid to directors of cooperatives and their wholly-owned subsidiaries. The final regulations impose penalties of $20 per day to a maximum of $10,000 per return for failure to comply with the public inspection requirements. An exempt organization is not required to provide a copy of its exemption application or Form 990 if this information is available on the Internet and the requesting individual is notified where to locate the documents. These documents must nevertheless be available for public inspection at the organization’s principal offices.

Required Filing

Form 990 is a 12 page core form and standardized schedules.

The Core Form 990 is required to be completed by all organizations. For 2015, this consists of the following twelve parts:

 Part I, Summary

 Part II, Signature Block

 Part III, Statement of Program Service Accomplishments

 Part IV, Checklist of Required Schedules

 Part V, Statements Regarding other IRS Filings & Tax Compliance

 Part VI, Governance, Management, and Disclosure

 Part VII, Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors

Part VIII, Statement of Revenue

 Part X, Balance Sheet

 Part XI, Reconciliation of Net Assets

 Part XII, Financial Statements and Reporting

Form 990 also contains 16 Schedules. Organizations should complete Part IV, the Checklist of Required Schedules, to determine which of these schedules must be filed as part of the Form 990.

Officers, Directors, Trustees, and Key Employees

Form 990 has reporting requirements for officers, directors, key employees and highest compensated employees. Compensation must be reported for the calendar year ending with or within the organization’s tax year if they exceed certain thresholds. This reportable compensation generally refers to compensation reported on Form W-2, Box 5 (Medicare Wages) and Form 1099-MISC, Box 7.

The following information must be reported for each officer, director and trustee (no minimum compensation threshold), and for each reportable key employee (see next paragraph):

 Name and Title

 Average hours worked per week devoted to position

 Compensation

 Contributions to Employee Benefits Plans

 Expense accounts and other allowances that must be reported on their income tax returns (i.e. amounts they did not account for to the organization or allowances in excess of the expenses for which they accounted).

For purposes of Form 990 reporting, a current key employee is an employee of the organization (other than an officer, director, or trustee) who meets all 3 of the following tests:

 $150,000 Test:

Receives reportable compensation from the organization and all related organizations in excess of $150,000 for the calendar year.

 Responsibility Test:

1. Has responsibilities, power, or influence over the organization similar to officers and trustees

2. Manages an activity within the organization that represents 10% or more of the organization’s activities, assets, or expenses

3. Shares authority to control 10% or more of the organization’s capital expenditures, budget, or employee compensation.

 Top 20 Test:

Is one of the 20 employees with the highest reportable compensation that meets both criteria mentioned above.

If an employee is not characterized by the above description for key employees, that employee may still need to be reported on Form 990. The top 5 employees receiving reportable compensation over

$100,000 must be reported also. The information necessary for disclosure is the same as the officers, directors, and trustees.

Increased Transparency

Form 990 also includes governance questions and related disclosures, including the following areas of interest:

 Business and family relationships of officers, directors, trustees, and key employees outside the organization and compensation received by these individuals.

 Donor advised funds

 Solicitations of contributions

 Gross income from members or shareholders

 Governing body procedures

 Conflict of interest policies

 Whistleblower policies

 Document retention and destruction policy

 Compensation review policies Financial Statement Detail

An analysis of income and expense items differs from the corporate financial statements. These include:

 Detailed related and exempt function revenue

 Unrelated business income and expenses

 Excluded unrelated income

 Other excluded income

The assets, liabilities, and expense schedules are also included.

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CHAPTER 27 - FORM 990-T, EXEMPT ORGANIZATION INCOME TAX RETURN (COOPERATIVES)

Filing Requirements

Form 990-T is filed by exempt utility cooperatives with gross income from unrelated trade or business activities of $1,000 or more. Tax is calculated on the net unrelated trade or business activity income in excess of $1,000 at the regular corporate income tax rates.

Due Date and Extension

Form 990-T is due May 15^th for calendar year corporations or the 15^th day of the 5^th month following the fiscal year end. The return is filed with the IRS Service Center in Ogden, Utah. An automatic 6 month extension of time to file can be obtained by filing Form 8868 before the due date. Extensions do not extend the time to pay tax. Any remaining tax is due at the time the extension is filed.

Estimated Tax

Quarterly estimated tax payments are required if the tax on unrelated business income is expected to be

$500 or more. An organization’s (except a private foundation) federal estimated tax payments are due by the 15^th day of the 4^th, 6^th, 9^th, and 12^th months of the tax year. For a private foundation, the federal payments are due by the 15^th day of the 5^th, 6^th, 9^th, and 12^th months of the tax year. Estimated tax payment due dates vary for each state. If the estimated taxes are not paid by the due date a penalty will be charged. The penalty is figured separately for each due date.

Electronic Deposits: Effective January 1, 2011, the IRS required that all organizations deposit their taxes electronically.

Unrelated Business Income

An unrelated business is any trade or business, conducted on a regular basis, that is not substantially related to an organization's exempt function. Income from unrelated business is subject to federal income tax.

Purpose

The unrelated business tax was imposed to eliminate unfair competition. It placed the exempt organization on the same basis as nonexempt organizations when they competed in an activity unrelated to their exempt function.

State Taxation of Unrelated Business Income

Income from unrelated business income is subject to state income tax in Idaho, Illinois, Iowa, Minnesota, North Dakota and Wisconsin. Wisconsin also has an Economic Development surcharge, which is applicable to exempt organizations whose unrelated revenue is $4 million or more. The Economic Development surcharge rate for organizations taxed as corporations is the greater of $25 or 3% (.03) of Wisconsin gross tax liability, but not more than $9,800. For organizations taxed as trusts, the rate is the greater of $25 or .2% (.002) of Wisconsin net business income, but not more than $9,800.

Related Business Income

An organization's exempt function is stated in their Charter of Incorporation. Related business activities must have a substantial causal relationship to and contribute importantly to the organization's performance of its exempt function. This is determined by:

 facts and circumstances;

 governing state laws regarding permissible activities; and

 usual method or means used by the industry to accomplish its main purpose.

To be related to a cooperative’s exempt function generally requires the business be done with members.

Cost Allocation

Costs must be allocated when personnel and facilities are used for both related and unrelated business purposes. Expenses directly attributable to the unrelated business are allowed as a deduction in calculation of taxable unrelated business income.

Excluded Unrelated Business Income

The following items are specifically excluded from unrelated business income:

 dividends, interest, annuities, royalties and related deductions;

 real property rental and related deductions, unless the rented property is debt-financed;

 gains and losses from the sale, exchange or other disposition of property;

 net operating losses from related or excluded unrelated business; and

 qualified pole rental to another company.

Included Unrelated Business Income

The following items are examples of unrelated business income for a utility cooperative:

 deregulated related activity income from nonmembers who do not receive utility service from the cooperative;

 nonregulated related activity income from nonmembers who do not receive utility service from the cooperative;

 advertising in membership publications;

 sales of membership lists which are actually marketed;

 debt-financed income; and

 interest, annuities, royalties and rents received from a controlled corporation.

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CHAPTER 28 - ALTERNATIVE LEGAL STRUCTURES FOR

In document Utility Tax Guide (Page 155-160)