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OBJECTIVES
Used to provide information on particular financial transactions or arrangements between the organization and insiders
• These are transactions or arrangements that present issues of conflict, independence, or bias directly relevant to the board's decision-making process
Schedule L disclosures should be considered part of the broader process of preserving impartial decision-making
• Relates to transactions between an exempt organization and its current and former insiders (the key decision-makers of the organization)
Disclosure efforts are based on a reasonable efforts standard for the organization
Incorporates transactions that involve excess benefits for intermediate sanctions purposes
• Loans to or from insiders
• Grants or assistance benefiting insiders
• Business transactions involving insiders
Schedule L
Schedule L
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NEEDS TO BE COMPLETED UNDER THE FOLLOWING CIRCUMSTANCES
• If engaged in an excess benefit transaction with an insider during the applicable tax year
• If became aware in current tax year that engaged in an excess benefit transaction with insider in previous year
• If made a loan to, or received a loan from, an insider or highly compensated employee, and such loan was outstanding at the end of the applicable tax year
• If provided a grant or other assistance to an insider or substantial contributor, or to any person related to an insider or a substantial contributor
• If had a direct business relationship with an insider or with someone related to the insider
UTILIZE SCHEDULE L TO ASCERTAIN WHETHER A VOTING MEMBER ON THE BOARD OF DIRECTORS IS INDEPENDENT FOR PURPOSES OF PART VI, LINE 1B
DIFFERENT DEFINITIONS OF “INSIDER” FOR DIFFERENT PARTS OF THIS SCHEDULE L
Schedule L
Part I
EXCESS BENEFIT TRANSACTIONS WHICH THE PUBLIC CHARITY HAS ENTERED INTO WITH INSIDERS
• All excess benefit transactions must be reported, regardless of amount
• Description of the excess benefit transaction must be provided in column (b)
• Whether the excess benefit transaction has been corrected by the public charity must be noted in column (c)
• Information regarding the §4958 excise tax (e.g. whether an insider was reimbursed for payment of the excise tax) must be reported on Line 2 and Line 3
PART I INSIDER DEFINITION
• Disqualified persons as defined in Sec. 4958 of the Internal Revenue Code
Schedule L
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Part II
LOAN ARRANGEMENTS WITH INSIDERS (OFFICERS / DIRECTORS / KEY EMPLOYEES) AND HIGHLY COMPENSATED EMPLOYEES
• No minimum reporting thresholds
• Ordinary course of business exception
• Loan = includes salary advances (but not those under an accountable plan) and receivables
• Required information to be reported
• Name of insider
Whether debtor or creditor
• Purpose of loan
• Original principal amount
• Balance due
• Whether the loan is in default at year-end must be noted in column (e)
• Whether the loan arrangement was approved by the Board of Directors or a committee must be noted in column (f)
• Whether there is a written loan agreement must be noted in column (g)
CURRENTLY, PLACING FUNDS ON DEPOSIT WITH A BANK DOES NOT CONSTITUTE A “LOAN” FOR PURPOSES OF PART II REPORTING
Schedule L
Part III
PROVISION OF GRANTS AND ASSISTANCE TO INSIDERS (INCLUDING SUBSTANTIAL CONTRIBUTORS)
• Part IV, Line 27 triggering question
• No minimum reporting thresholds
• For example, providing a scholarship to the child of the Executive Director of the public charity
• For educational scholarships, names do not need to be disclosed to protect identities of students
• Make sure not to report names of the individual recipients
REPORTING EXCEPTIONS
• Grants to insiders as member of charitable class if the grant or assistance is provided on similar terms to other members of the charitable class
• Compensation payment to insiders for services rendered NOT reported here
PART III INSIDER DEFINITION
• Directors / Officers / Key employees
• Grant Selection Committee members
• Substantial contributors (contributed at least $5,000 to organization during year and is required to be reported by name on Schedule B)
• Identity of the substantial contributor not reported on Schedule L so that such information is not made public
Schedule L
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Part IV
DIRECT BUSINESS RELATIONSHIPS BETWEEN THE PUBLIC CHARITY AND AN INSIDER
• Here, need to report transactions between the exempt organization and the insider
• All payments from single transaction with insider during year exceed greater of $10K or 1% total revenues
• All payments from multiple transactions with insider during year exceed $100K
• Organization paid compensation greater than $10K to family member of certain insiders
Examples of business transactions
• Contracts of sale / Leases and licenses / Performance of services / Joint ventures
• Board member of the exempt organization is President of bank where exempt organization has account, earns interest, pays bank fees
Insider definition
• Current officers, directors, (regardless of compensation) and key employees
• Former officers, key employees, highest compensated employees if receiving more than $100,000
• Former directors if receiving more than $10,000
• 5 highest paid employees (excess of $100,000)
Schedule L
Transactions with insiders are permissible, but it is important that the organization has the proper procedures in place to ensure that transactions are entered into at arm’s length.
Signs of good governance
• Conflict of interest policy and annual procedures to monitor conflicts of interest (Part VI, Line 12a)
• Large board of directors (Part VII)
• Board does not have voting blocks (Part VI, Line 2)
• Reasonable compensation procedures are generally used and are described on Schedule O
• Board receives a copy of the Form 990 and there are review procedures in place (Part VI, Schedule O)
Schedule L
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What types of noncash contributions does an organization receive?
What can we glean?
• What types of noncash contributions are accumulated by an organization
• What does the organization do with those noncash goods?
• Is an organization complying with their reporting requirements for noncash contributions?