Understanding IRS Form 990

NONPROFIT CONSULTING DAYS 2021

Understanding IRS Form 990

April 21, 2021 3-5PM

1

Laurence Scot, MBA, CPA

Skody Scot & Co., CPAs

“30 Years Servicing and Advising NFPs!”

520 Eighth Avenue, Suite 2200, NY, NY 10018 212-967-1100 X203 [email protected]

Understanding IRS Form 990

General Introduction

 Laurence Scot, MBA, CPA

 Accountant – 40+ years

 Co-founder/Co-Managing Partner Skody Scot & Company, CPAs

 Boutique NYC CPA Firm-Specializing in helping NFPs 30 years

 Audits (100+), Returns (650+) & Advising (Local, National, Int’l Orgs.)

 Board Member (Chair, Treasure, etc.)

 Teaching, Seminars, Lectures & Continuing Education

 Undergraduate & Graduate Courses

 CPE (for CPAs)

 Panelist/Lecturer (Banks: Investors, First Republic, Morgan Stanley,

Chase; NPCC, Manhattanville College, etc.

 Created Certificates Programs in:

 Created Certificate in NFP Acctg and Gov’t Reporting (NYU – 2008-2014)  Certificate in NFP Fin’l Mgmt & Reporting – (Baruch – 2014-2017)

 NFP Fin’l Mgmt. & Reporting & NFP Bookkeeping – (Fordham – Fall 2018)

Form 990

General Points-Observations

 Forms 990 - probably the most transparent forms filed with the IRS

 Open to the general public with some exceptions (e.g. donor names)

 Readers of 990s

 Regulatory agencies (IRS, Dept. of Labor, State agencies-AG, etc.)

 Government and State granting agencies (e.g. DOL, DOE)

 Foundations, Corporations and Individual Donors

 Bankers, lenders and vendors

 Researchers, analysts and educational institutions

 Accuracy needed to ensure compliance with:

 Federal and state laws, rules & regulations

 Proper use of grants and contributed funds

(i.e. protect the public)

 Must file even if DIDN’T file Form 1023 or 1024

 & DIDN’T received IRS letter recognizing tax exempt

status

 Check off box “application pending”

Not-For-Profits Statistics

# of Returns filed by Tax-Exempt Organizations (per 2019 IRS Data Book)

 Total Returns = 1,580,421  (990/990-EZ/990-N)  (990-PF, 990-T)  5 States > 35%  California = 172,406  Ohio = 99,972  Texas = 99,743  New York = 98,680  Florida = 89,692

Filing Thresholds, Due Dates & Extensions

 Federal Annual Filings - 501(c3) Public Charities

 990-N (ePostcard) (≤$50K annual Gross Receipts)

 990-EZ (>50K & <$200K Gross Receipts & <$500K Total Assets at YE)

 990 (≥$200K Gross Receipts & ≥$500K Total Assets)

 990T (≥$1K Unrelated Business Income Tax – Taxability)

 Due Dates

 Initial – 4 ½ months after the end of operating year

 For 12/31/x1 – Due May 15th _x2

 For 6/30/x1 – Due November 15th _x1

 Automatic 6-Month Extensions

 Form 8868 4½ months after the end of operating year (i.e. 10 ½ months)

 For 12/31/x1 – Due November 15th _x2

 For 6/30/x1 – Due May15th _{subsequent year x2}

 990 - Taxpayer First Act enacted 7/1/19 requires exempt organization to

electronically file information returns & related forms for tax years beginning after 7/1/19 (e.g. 2020).

Late Filing Penalties

 If gross receipts <$1,084,000 and filed after the due date (including extensions)

and the organization doesn't provide reasonable cause for filing late

 lRS impose a penalty of $20 per day plus interest

 Max. penalty - $10,500, or 5% of Org’s gross receipts, whichever is less.

 If gross receipts ≥$1,084,000 and filed after the due date (including extensions)

 lRS impose a penalty of $105 per day plus interest

 Maximum penalty - $54,000

 Example – 12/31/x1 year-end, due date 5/15/x2 <$1,084K >$1,084K  Filed NO extension

 Filed 8/15/x2, Approx. 3 months late (90 days) = $1,800 $ 9,450

 Filed 6 mo. Extension (8868) by 5/15/x2. Due 11/15/x2

 Filed 1/15/x3, Approx. 8 months late (240 days) = $4,800 $ 25,200

 Extension is disallowed (not 2 months late)

 If no returns are filed for 3 consecutive years, Automatic Revocation

 Lose tax exemption

 Can request abatement of penalty if show late filing due to reasonable cause

 Relied on professional to file (e.g. CPA) & professional was negligent

 To avoid late filing, prepare initial return with available info. & then file

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Form 990

Return of Organization Exempt

from Income Tax

Form 990 Part I-Part XII

(12 pages)

Schedules A-R (no P&Q)

(16 Schedules)

Pg 1 _{Pg 2} Pg 7 Pg 6 Pg 5 Pg 4 Pg 3 Pg 10 Pg 9 Pg 8 Pg 11 _{Pg 12} Not all schedules have to be completed by all Orgs.

Form 990 -

IRS Key Concerns

Organization Concerns

IRS Key Concerns

 IRS is the gov’t regulatory agency responsible for approving income tax

exemption & ensuring that Orgs. aren’t engaging in unlawful activities.

 Form 990 & Schedules are designed to determine if unlawful or unacceptable

activities exist & assist IRS in determining that:

 Org. is complying with its exempt mandate (must describe activities)

 Compensation is reasonable & employees are protected (Salary Info.)

 Public charities are meeting public support test (remove large donations)

 No Quid Pro Quo exist (reason for disclosing names or large donors)

 Org. not participating in political campaigns

 Lobby activities are not substantial (for Public Charities)

 Public charities cannot operate for the primary purpose of an unrelated

trade of business (file 990-T UBI)

Organization Concerns – LS Perspective

 Board / Management review is not comprehensive – Most questions relate to:

 Spelling Board Members names correctly & amount of time spent

 Program descriptions

 Practically nothing on disclosures (boxes) checked or not checked off

Federal Form 990 - Page 1

Purpose/General -

Identifies Organization & Key Information

Issues/Errors/Omissions/Helpful Tips

 Section B - Check boxes if applicable

 Name Change – Cannot e*file. Must mail with copy of amended Certificate

 Initial or final return (short year). Check box & put beginning/ending period

 If changing year and not initial or final Cannot e*file

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1

2

1

Beginning 01/01/x1 and ending 06/30/x1

Federal Form 990 - Page 1

Purpose/General -

Identifies Organization & Key Information

Issues/Errors/Omissions/Helpful Tips

 Part I - Summary

 Only 1½ lines. Description continues on Sch. O (BOD always questions)

 On bottom of Page 1 says:

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1

Federal Form 990 - Page 1

Purpose/General -

Identifies Organization & Key Information

Issues/Errors/Omissions/Helpful Tips

 Part I – Summary – Lines 8-22

 Provides a 2 year “snapshot” of revenue, expenses, assets & liabilities

 Summary numbers come from totals on other pages

 If these don’t agree with the totals on other pages will receive an IRS letter

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1

Federal Form 990 - Page 1

Purpose/General -

Identifies Organization & Key Information

Issues/Errors/Omissions/Helpful Tips

 Part II – Signature Block

 Per instructions, should be signed by a legal Officer

 Many time the Executive Director signs return but is not a legal Officer

 So technically shouldn’t be signing return

 Sometimes new Officers don’t want to sign return covering predecessors

 However, a current Officer is required to sign

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1

Federal Form 990 - Page 2

Statement of Program Service Accomplishments

Issues/Errors/Omissions/Helpful Tips

 Part III, Line 4 – Describe 3 largest Programs Srvs. & their accomplishments

 Many times the accomplishments aren’t included

 Part III, Line 4a - 501(c)(3) & 501(c)(4) Organizations must include

 Expenses, including grants – These are grants given out (not rec’d)

 Revenue earned from program services (excludes contributions)

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2

2

55 people attended in 2020

Federal Form 990 (Pages 3 & 4)

Part IV (Checklist of Required Schedules)

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GENERAL

 38 Questions on 2 pages (3 & 4)

 Determine which Schedules must be completed (A – R)

 Based on Activities and/or $ Thresholds

 Check YES, NO or leave Blank

 Checklist reduces incomplete returns, IRS notices & penalties

Issues/Errors/Omissions/Helpful Tips

1. Must use Instructions & Glossary, Appendix to assist in completing/answering questions

 E.G. – What is a 509(a)(1) or a 170(b)(1)(A)(vi) ?

2. Believing that all lines must be either Yes or No (Incorrect)

Federal Form 990 (Pages 4 & 5)

Part V (Stmts Re: Other IRS Filings & Tax Compliance)

GENERAL

 Part V puts important tax compliance information in one place

 Alerts Org. to potential other filings

beyond Form 990

 Pertains to Employment Taxes,

Information Returns, etc.

 Some questions relate to other IRS

forms that might be applicable

Federal Form 990 (Pages 4 & 5)

Part V (Other IRS Filings & Tax Compliance)

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 Lines 1 & 2 – # of Form 1099s & W2s reported

 Filed for the calendar year ending With or Within

 In past - IRS couldn’t confirm payments made to FYE service providers

 W-3s/1096s easy to confirm



Issues/Errors/Omissions/Helpful Tips

 For Fiscal Year (FY) Orgs. must use the prior Calendar Year W2s & 1099s

 Per IRS – Suspicious if no W2 & only 1099s

Page 4 Bottom of Page

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Page 5

Federal Form 990 (Page 6)

Part VI (Governance, Mgmt. & Disclosure)

GENERAL

 Part VI – ALL Orgs. must complete

 Extra Burden – Info. NOT readily available

 NO requirement to provide info. in Internal

Revenue Code (IRC)

 But IRS considers this info. indicative of

Good tax compliance

 3 Sections

Governing Body & Management

“Group of persons authorized under state law to make governance decisions on

behalf of Org. & its S/Hs or Members”

E.G. BOD or Board of Trustees

Policies – Internal policies

 Disclosures - How Org. makes important

info. available to the public - E.G.

 Form 1023, 990 are available on request

Details Next Page

A A C B C B

Federal Form 990 (Page 6)

Part VI, Sec. A (Governing Body and Management)

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 Lines 1a – # Voting Members of BOD (typically excludes Executive Director)

 Who can vote is delineated in the Bylaws

 Line 1b – # Independent Voting Members – ALL 3 must apply all year

 NOT compensated as Officer/Other Employee of Org./Related Org.

 DIDN’T receive >$10K as Indep. Contractor from Org./Related Org.

 Exception – Reimb. Exp. or Pymts for serving on Board

 Member/Family Members – NO transactions between them & Org. &

Affiliated Org. (Directly or Indirectly)

 Line 2 – Any Dir., Officer, Key Emply (DOTKEY) have family/bus relationship?

Issues/Errors/Omissions/Helpful Tips

 Many time total # is confusing due to turnover during year (S/B at YE)

 If President is a Board member & paid a salary, NOT independent

 Many Orgs. have a problem disclosing relationships (E.G.)

(AB & SD are Spouses; Mr. JD on Board & provides discounted legal srvs.

1a 2 1b 2 1b 1a

Federal Form 990 (Pages 7 & 8)

Part VII (Compensation of DOTKEY & HICE)

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GENERAL

 Compensation info. on Current or Former (DOTKEY)

 Directors, Officers, Trustees & Key Employees

 5 Highest Compensated Employees (HICE)

 5 Current Independent Contractors

 Includes Comp. from Org. & Related Orgs.

 Related = Parents, Subsid., Brother/Sister & others

 ALL Orgs. must complete Part VII, & Sch. J (if applicable)

DEFINITIONS

 Current DOT - NO minimum Comp. Threshold)

 Serving anytime during Fiscal Yr. (not Cal. Yr.)

 Top Management Official (Executive Director)

 Considered an Officer (only here)

 Top Financial Official (CFO, VP or Director of Finance)

 Considered an Officer (only here)

 HICE – 5 highest ≥$100K

 KEY – 20 highest ≥$150K & hold responsible position

Federal Form 990 (Pages 7-8)

Part VII (Compensation of DOTKEY & HICE)

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Issues/Errors/Omissions/Helpful Tips

1. Beginning 2019 must list by highest to lowest income then DOTKEY, HICE)

2. Failure to properly list or classify DOTKEY

 Must include ALL Officers/Directors even if no Compensation

3. Failure to include (& check off) Exec. Dir. & Top Financial Officer as Officer

4. Comp. includes calendar year ending with/within tax year (= to W-2 or 1099)

 Not what is reported on Financial Statements

5. Confusion regarding which period to include compensation

 DOT – Anytime during operating year

 KEY & HICE – During calendar year

E.G. FYE 6/30/x2, LS started 1/1/x2, Salary $120K, Must use 12/31/x1 W-2

If DOT List but have to put $0, If KEY or HICE, DON’T list

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Federal Form 990 (Page 9)

Part VIII (Statement of Revenue)

GENERAL

 Part VIII reports revenue in 3 major

groupings:

1. Contributions, gifts, grants, and other similar amounts

2. Program service revenue 3. Other revenue

 Provides detailed breakdown of

contributions

 All Orgs. must complete Col. A “Total

Revenue”

 All Orgs. Except Sec. 527 Political

Orgs. must complete Cols. B-D

Col. B - Related

Col. C - Unrelated (UBI)

Col. D - Excluded under Sec. 512 – 514

C D

Federal Form 990 (Page 9)

Part VIII (Statement of Revenue)

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GENERAL

Rental income less rental expenses

Sale of stocks/other assets less cost/basis

Fundraising income less direct expenses

Income from bingo/other games less direct

Sale of inventory less cost of inventory

Issues/Errors/Omissions/Helpful Tips

 Many times expenses related to these

categories are included with M&G or F/R

expenses on the Statement of Functional

Expense. As such: 1 2 3

2

3

4

5

1

 Reduces ratio of program expense to M&G and F/R expenses – Not Good  **Problem – Many reporting requirements are based on Total Revenue. By

not including related expenses with revenue might have to have an Audit (NJ-$500K, NYS-$1.084M, California-$2M).

Federal Form 990 (Page 10)

Part IX (Statement of Functional Expenses)

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GENERAL

 List Expenses by Function (2 Dimension)

 Program, M&G & Natural Class

(e.g. salaries, rent)

 Sec. 501(c)(3) & (c)(4)

 Must complete Col. A-D

 All others ONLY Col. A (non 501(c)(3)

 Optional Col. B, C & D

Issues/Errors/Omissions/Helpful Tips

 Many Orgs. don’t allocate expenses to

Fundraising

 This is a flag to the IRS

 There is usually a cost to raising

contributions & grants (e.g. time)

 At a Minimum – Should allocate ED/

President’s salary to Program, M&G, F/R

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Federal Form 990 (Page 11)

Part X (Balance Sheet)

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Issues/Errors/Omissions/Helpful Tips

year ending

 Ending Balances Don’t agree to

Ending Balances on Page 1 –

Summary

 If 1st Yr., enter 0 on Lines 16, 26, 33 &

34 in Col. A

Federal Form 990 (Page 12)

Part XI (Reconciliation of Net Assets) &

Part XII (Financial Statements & Reporting)

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GENERAL

 Reconciles Net Assets

 On Statement of Financial Position to

items not included on Return

 E.G.

 Unrealized Gains/(losses)

 Donated Services & Facilities

 Required info. about Org’s.

 Accounting Method (Cash or Accrual)

 Was financial statements audited

Federal Form 990

Schedules

GENERAL

 Due to time restrictions ONLY covering certain parts of

certain important schedules (highlighted in red)

Federal Form 990 – Schedule A

GENERAL – VERY IMPORTANT SCHEDULE

 MUST be completed by Sec. 501(c)(3) (or 4947(a)(1) Non-exempt Charitable

Trusts)

 Sch. A – Used for “Public Charity Status” & “Public Support Tests”

 Ensures Revenue received justifies Reason for Exempt Status

 Sch. A - tests in 2 Parts – Part II (pg 2) & Part III (pg 3)

 Complete Part based on level of public support

 First 5 yrs. - Check same Status box as in IRS Exemption/Ruling Letter

 Thereafter- Check Appropriate Box regarding Exempt Status

 After first 5 yrs. – If fail test 2 years in a row

Federal Form 990 – Schedule A (Page 1)

Public Charity Status & Public Support

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SPECIFIC - Reason for Public Charity Status

 Part I – Line 7 (Substantial Publicly Support) – Sec. 170(b)(1)(A)(ii)  Highest Charitable Level (i.e. most public support)

 To qualify as Publicly Supported:

 ≥33 1/3% of Total Support MUST be Contributions/Grants from :

 Gov’t agencies, General Public/Other Charities

 If checked must complete Part II (Pg. 2) Support Schedule – Next Slide

Issues/Errors/Omissions/Helpful Tips

 Must track individual contributions annually (many Orgs. don’t)

Federal Form 990 – Schedule A (Page 2)

Reduction for Excess Contributions (

>2%

over

5

Years)

SPECIFIC - Reason for Public Charity Status

 Part I – Line 7 (Substantial Publicly Support) – Sec. 170(b)(1)(A)(ii)  Highest Charitable Level (i.e. most public support)

 To qualify ≥33 1/3% of Total Support MUST be Contributions/Grants from:

 Gov’t agencies, General Public/Other Charities

Issues/Errors/Omissions/Helpful Tips

 Must track individual contributions annually (many Orgs. don’t)

 Must Exclude Contributions >2% of Total Support (I.E. >2% of 5 years total)

Exclude portion of donations

>2%of Line 11

2% X $24,160,636 = $483,213

5 Donors exceeded $483,213

Federal Form 990 – Schedule A (

Supporting Schedule

)

Reduction for Excess Contributions (

>2%

over

5

Years)

31

Exclude portion of donations >2% of Line 11 = 1,340,000 - 483,213 = 3,058,500 - 483,213 = 1,220,000 - 483,213 = 2,573,715 - 483,213 = 1,010,000 - 483,213 17,334,807

÷

Federal Form 990–Schedule B (Page 1)

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GENERAL – Provides information on Contributors

 501(c)(3) & other Orgs. exceeding contribution threshold

 MUST complete/attach Sch. B

 Sch. B - ONLY Open to Public Inspection for 990-PF & Sec. 527 Pol. Orgs.

 ALL Others – Sch. B NOT open to Public Inspection but MUST file with IRS

Issues/Errors/Omissions/Helpful Tips

1. Some organizations don’t want to disclose donors or put “Anonymous”

 Required under IRC Sec. 6033(b)5) & for number of reasons:

 First – NOT “Publicly Disclosed” - Privacy is Ensured

 Ensures Public Support Test (Hiding multiple gifts from same donor)

 Substantiates - Not a Related Party or “Quid-Pro-Quo” transaction

Federal Form 990–Schedule B (Pages 1 & 2)

(Schedule of Contributors)

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SPECIFIC

 General or Special Rules for Filing

 General Rule (All Orgs.) MUST include ALL contributions ≥$5K ($ or FMV)

 Unless Special Rules exception applies (for Sec 501(c)(3)/(7)/(8)/(10)

 Special Rules – Sec. 501(c)(3) /(7)/(8)/(10) Orgs. meeting ≥33 1/3% support test

 Include greater of any donation that is $5K or ≥2% of total Donations/Grants

 E.G. - Sec. 501(c)(3), Total Contributions/Grants = $2.5M, Donor gave $40K

($2,500,000 X 2%= $50K, $40K>$5K but <$50K = Excluded from Schedule)

Page 2 – Contributors

≥2%

Federal Form 990–Schedule O

(Supplemental Info. To Form 990)

GENERAL

 Sch. O – “Lined Pad”

 Convenient place to supply Add’l Info.

 Explains/Elaborates on answers to other 990 questions

 Certain questions require supplemental

explanations

 ALL filers MUST complete Sch. O

 Sch. O - Pg 2 (continuation sheets) - Use as

many as needed

 Proper Heading (Order) for all answers

 990 Part (I-XI) / Line / Column OR

Schedule / Line / Column

 E.G. IF Amended Return checked (990 Pg 1,

Heading Section, Item B)

 List all changes on Sch. O

Continuation of Mission info.

Board Relationship

990 Approval Process

Conflict of Interest

Executive Compensation

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