The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.
Unpacking the Form 990:
A Deeper Dive
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The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.
Unpacking the Form 990:
A Deeper Dive
The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an
accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought.
THE FORM 990 IS A PUBLIC DOCUMENT
• Anyone can access it for any reason
• Must make available without charge at principal office
• No reason needs to be given to see Form 990
• Need to provide back 3 years
• Also includes tax exemption application (Form 1023) and any information attached or included within
Primary source of information for “users” of Form 990
• Members of general public
• Internal Revenue Service / State authorities (e.g. Attorney General)
• Potential donors
• Researchers
• Newspapers and other media
• Competitors
• Those not agree with your exempt purpose activities
• Charity rating organizations / GuideStar
• Anyone else
Purpose of the Form 990
The World of Nonprofits
• Organizations filed by tax exempt entities
• Form 990: Gross receipts of at least $200,000 or assets worth at least $500,000
• Form 990-EZ: Gross receipts of less than $200,000 and assets worth less than $500,000
• Form 990-N: Gross receipts of less than $50,000
• Form 990-PF: All private foundations (regardless of size)
• All tax exempt organizations are required to file some sort of form on an annual basis, regardless of the code section that they are exempt under.
• Some entities are excluded from all filings:
• Governmental Entities
• Churches
• Foreign Charities / NGOs
•
Penalties (Sec. 6652(c) of the Internal Revenue Code)
• $20 per day (small exempt organizations)
Maximum of lesser of $10,000 or 5% of the gross receipts of the exempt organization
• $100 per day (gross receipts exceed $1 million)
Maximum of $50,000
• Organization’s manager could also be liable for penalties
California – charities should not pay any penalty, fine or judgement
•
Filing incomplete return is deemed to be as if never filed
• Statute of limitations does not start in such a situation
• Reasonable cause = reliance upon a knowledgeable professional if organization furnishes professional with all the necessary information
Failure to File 990
• Enhancing transparency
• Many members of the general public rely upon the Form 990 as their primary or sole source of information regarding a tax-exempt organization
Summary page provides snapshot of key financial, governance, and operating information, including comparison of past two years’ revenue, expenses, assets, and liabilities
• How the public perceives a tax-exempt organization could be largely controlled by the information presented on the Form 990
• Promote compliance
• Very detailed reporting requirements
• Elimination of unstructured attachments
• Allow IRS to efficiently assess risks of noncompliance
• Minimize filing burdens for exempt organizations and reduce recordkeeping
• Asking Form 990 questions in manner that makes it relatively easy to complete the form
Organizations with complicated compensation arrangements, related entity structures, and activities which raise compliance concerns
•
Box B
• Address change/Name change/Final/Amended/Application pending
•
Box J
• IRS accesses exempt organization web sites
• Unrelated business income example • Political activity example
•
Box M (more of a state issue)
• Fundraising Expenses
• Internal Revenue Service calculates following ratio
• Part I, Line 16b.Part I, Line 8 (current)
• How much does it take to raise contributions revenue for the entity
• Rule of thumb = between 5% and 15%
• This ratio was included on a draft version of the Form 990
• Reasons for outside rule of thumb range
• First couple years of existence
• Big capital campaign
• Same donors year after year
• Much contributions revenue generated through special events
Form 990, Part I
• Fundraising costs are associated with seeking, soliciting or securing contributions
• Direct versus indirect
• Direct: can include personnel, consultants, rent, printing, postage, telephone, costs associated with fundraising events, direct mail lists, direct contact solicitations and unsolicited merchandise
• Indirect: allocation of salaries expense and overhead
• How to allocate?
• Methodology must be reasonable, consistent and periodically reviewed and challenged
• Common metrics:
• Time
• Square footage
• Percentage of direct costs • Number of employees
• How to track?
• Real time versus annually
• New Activities (Line 2)
• Whether exempt organization has been operating outside legal boundaries of their organizing documents
• Important to periodically compare Form 990, Part III to Tax Exemption Application & Note 1 of audited financial statements (as applicable)
• Want to avoid IRS challenge that a new activity is not furthering exempt purposes
• Example of IRS audit re “new” fiscal sponsor
• Better late than never re unreported new program service activities
Form 990, Part III
• Program Service Revenue (Line 4)
• Importance of properly classifying the program service revenue of an exempt organization
• Public support test implications
• Ascertain whether the exempt organization is truly charging the direct recipients for the charitable services which they are receiving
• Examples
• Differences from GAAP perspective
• Information Return Reporting Requirements
• Form 1099
• Ensure exempt organization files all required Forms 1099 • Worker classification issues
• Backup withholding • Form W-2G
• Foreign bank account reporting
• FinCEN Form 114
Form 990, Part V
• Information Return Reporting Requirements (cont’d)
• Quid pro quo transactions likely when conduct special event
• Required charitable contribution acknowledgement to donor • Form 8282 filing requirements
• Generally when charitable organization receives a Form 8283 • Contributions of qualified intellectual property
• Contributions of vehicles
Section A – Who is governing the organization?
Form 990, Part VI
• 1b: Non-independent board members
• Receive compensation from or have a transaction with the filing organization
• 3: Outsourcing of management duties
Section B – What policies and procedures does the organization have in place?
Form 990, Part VI
• Policies + procedures noted here are not “required” by the IRS
• Best practices
• Entities who follow best practices are determined to have less risk
• Form 990 review
• Sent to full board before filing
• Review procedure in place
• Conflict of Interest
• Policy
• Annual Procedure for determining conflicts
• Whistleblower policy
• Could cover employees and volunteers
• Document retention and destruction policy
•
Reasonable Compensation (Executives)
• Executives
• Board members
• Top management / Top financial • Key employees
• Rebuttable presumption of reasonableness
• Board approval • Comparability data
• Contemporaneous documentation of entire process
Form 990, Part VI
•
State Charitable Solicitation Registrations
• List states with which copy of this Form 990 is required to be filed
• Required to register in those states where soliciting donations from
• Many states take the position that “soliciting” when receiving contributions from that states’ residents
• Many states becoming much more aggressive regarding enforcing of their charitable solicitation registration statutes
• We take a very practical “real world” approach regarding this
•
Independent Contractors
• Insider transactions
• Related party transactions
• Private benefit transactions
• Professional fundraisers
• Issuance of Forms 1099
Form 990, Part VII
• Breaks down just the revenue
• Functional basis (types of revenues)
• Classification – rows)
• (B) Programmatic
• (C) Unrelated (Taxable – 990-T)
• (D) Revenue that is not programmatic, but is not specifically taxed
• Contribution Revenue
• No goods or services received in exchange
• Breaks down by type • Programmatic revenue
• Fee for service / earned income
• Generally, related to charitable purpose • Investment income
• Interest / dividends / royalties
• Rental income (not programmatic)
• Capital gains (Realized only)
• Fundraising revenue – Sch G has more details
• Special events (net direct expenses)
• Unreported Unrelated Business Income
TRADE OR BUSINESS / REGULARLY CARRIED ON / NOT RELATED TO EXEMPT PURPOSE
• Investment Income • Alternative Investments
• Rental - Personal services / Personal property • Debt financed investments
• Regularly Carried On Activities
• Auction / Raffle / Golf tournament / Advertising
• Miscellaneous Revenue
• Different revenue streams may not be related function income
Form 990, Part VIII
Reconciling tax revenues with audit revenues – Schedule D, Part XI
• Common Adjustments
• Unrealized gains / other mark to market adjustments
• Donated services and facilities
• Investment expenses
• Reconciliation is prepared if there is a separately prepared audit (not required if audit is consolidated)
Form 990, Part IX
28
• Breaks down just the expenses (not already net in revenue) • Natural classification – rows (akin to a trial balance)
• Functional classification – columns
• (B) Programmatic
• (C) Management and general • (D) Fundraising
• Grant expenses
• Breaks down between domestic organization, domestic individuals and foreign entities
• Review Schedule I to see if granting to related entities • A focus on compensation for services
• Breaks out compensation between disqualified persons and other salaries and wages on a fiscal basis
• Many lines address both wages and fees for services that are not compensation
• Functional allocation
• What allocation of expense is considered healthy? • What could artificially increase program allocation?
• Management Fees (Line 11a) • Lobbying (Line 11d)
• Election?
• Whether too substantial or not in absence of election • Properly calculated?
• Professional Fundraising Services (Line 11e)
• Private benefit?
• Registered?
Reconciling tax expenses with audit expenses – Schedule D, Part XII
• Common Adjustments
• Prior period adjustments
• Donated services and facilities
• Expense reclassification (investment expense, special event expense, etc.)
• Reconciliation is prepared if there is a separately prepared audit (not required if audit is consolidated)
Form 990, Part IX
Ensures that the organization qualifies as a public charity
What can we glean?
• What type of public charity is the filing organization?
• How broad is the support of a public charity?
• Is an organization at risk for losing its classification as a public charity?
• Might a grant provided by the foundation “tip” the public charity to private foundation status?
Schedule A: Public Support
•
Confirms why the filer is not a PF.
•
To verify and reflect how the filer meets
its public charity status and reporting
obligations:
• Organization’s self report classification (it may be different then IRS Master File)
• Disclose additional information for supporting organizations
Purpose of Schedule A
Private Foundations Public Charities 33 ⅓% public support 509(a)(1) organizationscontributions 509(a)(2) organizationsprograms
Schedule A – Four Categories
34 Part II Parts IV & V Part III Part I onlychurch; school; hospital; medical research org
gov’t; public safety
donative public charity; benefitting a state
school; community trust
operating public charity
•
All 501(c)(3) organizations must fill out Part I;
•
Certain organizations are deemed charitable
and no further information is needed.
• Part II may be completed in order to meet the
special rule for Schedule B (even a corresponding box in Part I does not require it to be completed)
• Transactions with interested persons (Sch L) includes substantial contributors listed on Schedule B
•
Other organizations need to meet a numeric
calculation of public support (Parts II and III)
•
Tipping occurs when a public charity can no longer meet the public
charity support test required by the IRS for two successive tax years.
•
If this happens then the public charity will be reclassified as a private
foundation.
•
The most common example of this is when a public charity receives a
large grant from a private foundation which "tips" the public charity into
private foundation status.
How does tipping occur and how can it be avoided?
Public Support + Foundation “Tipping”
•
Substantial part of its support from
• U.S. or state government, and
• Direct or indirect contributions from the general public
•
Will not qualify if receives “almost all” of its support from program revenue
•
At least 33 1/3% or
•
At least 10% plus facts and circumstances
Part II – Donative Public Charity
38
•
Numerator
+ Contribution and Grant Revenue + Value of Gvn’t Services and Facilities
- Excess contributions
•
Denominator
+ Contribution and Grant Revenue + Value of Gvn’t Services and Facilities + Investment income
- Realized and Unrealized Gains
• The portion of contributions from each* contributor that exceeds 2% of total support is excluded from public support. (Aggregate 5 year amounts)
• Thus, larger donations from a contributor can drive down the public support percentage.
• Each contributor includes family members and controlled entities.
• DAF Notice 2017-73 indicates it may also consider contributions from the donor’s DAF.
• Do not include unusual grants.
•
More than 1/3 of support from
•
Gifts, grants, contributions or membership fees, and
•
Gross receipts from programs
•
Not more than 1/3 of support from
•
Gross investment income, and
•
Excess of UBTI over UBTI tax paid
•
No 10% test available
Part III – Operating Public Charity
Part III – Operating Public Charity
•
Numerator
+ Contribution and Grant Revenue + Program Service Activities
+ Value of Gvn’t Services and Facilities
- Amounts from Disqualified Persons *
- Program Activity Revenue of more than $5,000 per person / 2% of total
•
Denominator
+ Contribution and Grant Revenue + Program Service Activities
+ Value of Gvn’t Services and Facilities + Investment income
- Realized and Unrealized Gains
Substantial Contributor
•
Grant or bequest attracted by the publicly supported nature of the
organization
•
Unusual or unexpected with respect to the amount thereof, and
•
By reason of size, adversely affects the public support test
•
Request for determination is optional
•
See Regs. §§1.509(a)-3(c)(3) and 1.170A-9(f)(6)(ii)
•
Report amounts on part IV (do NOT include names)
•
Certain organizations may switch back and forth between the two tests in Schedule A,
Parts II & III.
• Switching tests is acceptable (recommend maintaining both tests in the work papers if may occur);
• Purpose may include:
• Avoiding private foundation status; • Certain Schedule B disclosures
• More accurate reflection of the organization’s activities (complete lack of charitable contributions may require us of the 509(a)(2) (Part III) test.
Switching between 170(b)(1)(A) and 509(a)(2)
Supporting Organizations
• Disclosures should be consistent with
Core Form 990 and Schs I & R
• Expect additional reporting on Part VI
• Line 12g, Column (v) – includes
contributions paid on behalf of the supported organization
• Line 12g, Column (vi) – may include FMV
Supporting Organizations
46
• Private foundations can give to Type I,
Type II or Type III-FI supporting organizations
• If a PF gives to a Type III-NFI entity, the
Report significant donors to a charity
What can we glean?
• How broad the support is to the charity
• Whether contributions were cash or noncash
• Does an organization understand its public disclosure requirements
•
Reporting of Anonymous Donors
•
Method of Accounting
•
Special Rule
• Can be significant time saver
• Churches / Schools / Hospitals
• Complete Part II of Schedule A
Schedule B
•
Record total of all years’ pledges in the period in which the pledge is made
• Non-current pledges receivable should be discounted
•
Regularly review outstanding balances for collectability
•
Unpaid portion of gift will remain in temporarily restricted net assets until received
AND used
•
How to identify potential mis-reporting of multi-year gifts
• Review current year receipts for memos noting “installment” or other indicator of multiple payments
• Perform periodic sample audits of documentation supporting contribution / grant revenue
Does the organization participate in various types of advocacy
What can we glean?
• Does the organization support any political candidates?
• How much lobbying is done by the organization?
• Is the organization’s exemption at risk because due to advocacy activities?
• Are there activities that might put a private foundation’s grant at risk?
Schedule C: Lobbying and
Political Activities
•
Part I-A:
•
Narrative description of activities
•
Report expenditures
•
Report volunteer hours
•
Part I-B: 501(c)(3) should
NEVER
get here, BUT
•
Calculate tax on org AND MANAGERS
•
Report “correction” efforts
•
Part I-C: Section 527 activity
Schedule C, Part I: Political Activity (all filers)
•
Part II-A: Section 501(h)
electors
•
Calculation of lobbying limits
(direct, grassroots)
•
Report lobbying expenditures
•
Calculate 4-year aggregates
(“ceiling amounts”)
•
Part II-B: Non-electors
•
Narrative description of activities
•
Specific categories
•
“self-immolation” question
Schedule C, Part II: Lobbying (501(c)(3) only)
•
Part III-A: Exceptions to tax?
• Members not deducting?
• De minimis in-house lobbying?
• Prior year carry-over?
•
Part III-B: Proxy tax calculation
• Report dues, etc. received
• Report lobbying/political expenditures
• Report notices provided to paying members
• Calculate taxable expenditures (Form 990-T (limited sections))
•
Notice:
•
Members affirmatively warned not to take business expense deduction for
(portion of) dues (etc.)
•
If deducted and audited, member loses deduction
•
No tax to organization
•
Pay:
•
No notice to members
•
IRS gets paid, assumes members DID deduct (despite 162 prohibition)
•
No loss of member deduction
•
35% tax paid by organization
Proxy Tax: Notice or Pay?
Private foundations are not permitted to undertake lobbying or
political activities
•
“Lobbying” is the attempt to influence legislation through:
• An attempt to affect the opinion of the general public
• Communication with any member or employee of a legislative body, or with any other government official or employee who may participate in the formulation of the legislation
•
“Political Activities” is an attempt to influence the outcome of any specific public
election or to carry on a voter registration drive
Undertaking such activities could result in a “taxable
expenditure”
Advocacy can happen within limits
• Nonpartisan activities carried on directly (foundation) or indirectly (grant recipients) by a 501(c)(3):
• Not confined to one specific election period
• Are carried on in more than 5 States
• Substantially all of the entities income is expended directly for the conduct of charitable activities
• Meets certain support tests under 4945(f)(4)
• substantially all of the support of which is received from exempt organizations, the general public, governmental units described in section 170(c)(1), or any combination of the foregoing;
• not more than 25 percent of such support is received from any one exempt organization (including PFs);
• and not more than half of the support of which is received from gross investment income
• contributions to which for voter registration drives are not subject to conditions that they may be used only in specified states/districts/political subdivisions
Permissible Advocacy
Advocacy can happen within limits
• Specific Project Grant Rule
• A grant by a private foundation to fund a specific project of a public charity is not a taxable expenditure, even if the public charity engages in lobbying activities as part of the project, if each of the following requirements are met:
• The grant is not earmarked to be used in an attempt to influence legislation; and
• The sum of all grants made by the foundation for the same project for the same year does not exceed the amount budgeted, for the year of the grant, by the grantee organization for activities of the project that are not attempts to influence legislation.
• If the grant is for more than one year, the rule applies to each year of the grant with the amount of the grant measured by the amount actually disbursed by the foundation in each year or divided equally between the years, at the foundation's option. The same method of measuring the annual amount must be used in all years of a grant
Details on the balance sheet and the organization’s tax position
What can we glean?
• Better understanding of the assets and liabilities held by the organization
• Does an organization have an endowment, and how is it managed?
• Does the organization undertake any activities that could put its exemption at risk?
Schedule D: Financial Statement
Support
•
Liability for Uncertain Tax Positions
• Tax exemption
• Excessive lobbying • Political activities
• Substantial unrelated business income • Private inurement
• More than incidental private benefit
• Unrelated business income
• If EO has audited financial statements, ASC 740 footnote SHOULD be present in disclosures
Better understand an organization’s foreign spending and investing
What can we glean?
• How much does an organization spend in foreign country on grant making and direct activities?
• How much does an organization have invested in foreign assets?
• What type of foreign investments might the entity have?
Schedule F: Foreign Activities
•
Foreign Forms
• Form 926
• Form 5471
What methods does an organization use to fundraise?
What can we glean?
• Does an organization have any unsavory professional fundraising arrangements?
• What is an organization’s fundraising geography?
• How much is spent, and raised, via special events and gaming activities?
• How effective are an organization’s fundraising efforts?
Schedule G: Fundraising
• Relationships with Professional Fundraisers
• Definition of professional fundraiser
• Non-employee
• Custody over funds
• Act on behalf of the charitable organization
• How much does professional fundraiser retain?
Accounting for fundraising
• Lines 1-3: Revenue
• Reclassify gross receipts that were reported as contributions away from special events and to contribution revenue (Part VIII, Line 1c)
• Gross income represents only the quid pro quo portion • Lines 4-10: Expenses
• Deduct direct expenses
• Indirect expenses reported on Part IX, Column D
Line 10: A loss reported here does not signify an unsuccessful event
Schedule G
• Conducting of Gaming Events
• Legally conducting gaming events
Does the organization have any reportable transactions with any disqualified person?
What can we glean?
• Is there any fraud or reportable excess benefit?
• What types of transactions have occurred between the organization and any disqualified person?
• Is there information about why or how the transaction benefits the filing entity?
• Was the transaction undertaken according to the rebuttable presumptions test?
• Who in the organization is an “interested” party?
Schedule L: Insider Transactions
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
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
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
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
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
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)
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
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?
• When to record?
• Technical answer
• Upon receipt of item, estimate value
• Adjust books when item is sold
• “Real world” answer…
• Donated services
• Contributed services must either
• Create or enhance nonfinancial assets (ie: construction of a building), or
• Require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation
• Valuation of noncash items
• Determined by the exempt organization when recording on books
• Do NOT include a value on acknowledgement letter
• Valuation technique contemporaneously documented and consistently applied
• Fair market value at the time of donation based on all relevant factors, including:
• Item’s cost or selling price
• Sales of comparable items
• Item’s replacement cost, and
• An expert opinion (when necessary)
• Use of equipment
Noncash Transactions
• Reporting
• Creation of new accounts + separate line item on financial statements
• Need to book both noncash revenue AND noncash expense
• Form 990 reporting
• 1. Part IV, Line 29
• 2. Part VIII, Line 1g
• 3. If > $25,000, Schedule M
• http://www.irs.gov/pub/irs-access/f990sm_accessible.pdf
• 4. Corresponding expense should be in the appropriate line item on Part IX or Schedule G (if expense relates to the conducting of a special event)
What organizations share common control with the filing organization?
What can we glean?
• What organizations are closely affiliated to the filing entity and how are these organizations affiliated (common control,
parent/sub relationship, brother/sister relationships)
• Does the organization have any joint ventures?
• What types of transactions occur between the entities?
• This serves as an organizational chart with affiliated groups.
Schedule R: Related
Organizations
•
Parts I-IV, VI: Filer identifies related entities (and partnerships)
•
Affiliates
•
Disregarded entities (e.g., LLC)
•
Part V: Filer reports certain transactions with same (19 categories):
•
Contributions to and from
•
Shared staff
•
Other shared resources
•
Reimbursements
•
Loans, etc.
•
Reporting by affiliates should agree
•
Compensation of shared staff via common paymaster results in
reportable reimbursement
•
Additional reporting for larger transactions (>$50,000)
•
One transaction might be reportable on more than one line
Multi-Entity Groups: Schedule R – Common Issues
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