A Brighter Way
A Brighter Way
For many not-for-profit organizations, the revised IRS 990 form introduced this year can be troublesome. The new form was intended by the IRS to help organizations provide greater transparency about their activities to the public.
As a result, the revised 990 requires organizations to provide much more detailed information about the organization, especially regarding its income and expenses, staff salaries and organization policies. Therefore, organizations may need additional time to collect and prepare the information needed to complete their reporting requirement.
To help you complete the form more painlessly, here are 10 tips for better preparation for this annual requirement.
Of the three areas, pay particular attention to fundraising expenses. The IRS closely monitors an organization's fundraising expenses, but this information is often forgotten or omitted by not-for-profit groups.
Fundraising expense information is also critical to donors, because the information is posted on Guidestar.org. Donors will compare the expenses between one group and another when deciding where they want to place donations. If they don't see expenditures in this category, they may worry that fundraising efforts are not being properly managed. They know that well-run fundraising efforts, while incurring some expenses, are most likely to garner additional success.
The IRS requires documentation of the organization's policies on a variety of issues, including joint ventures, lobbying and political activity, making documents available to the public, the process for determining compensation, conflict of interest and document retention and destruction, just to name a few. If your organization does not have written policies in place, now is the time to firm up your group's policies and procedures.
In this case, the government is looking for written policies that are shared with staff, board members and officers and directors. But in addition to the required items, organizations are best served when they adopt best practices for effective governance, including policies on such topics as accounting procedures, budgeting, capital expenditures, performance evaluations, confidentiality, donor relations, dress policy, gifts, grants management and privacy, among others.
It can be tricky to reach the correct balance of detail in reporting your organization's expenses without submitting "minutia." However, the IRS wants to see the organization's wages, legal expenses, supplies and program expenses spelled out to a degree that shows proper management and budgeting practices.
A group will sometimes overlook the fact that they must file for not-for-profit status each year within their state. The revised Form 990 requires documentation that this function has been completed by the organization. Also, organizations that solicit funds in other states must file 501(c)(3) registration in these states annually as well.
Because public charities receive one-third of their income from public support, additional financial information is required with their Form 990. It's important to be sure to file this information each year and be consistent in the reporting format from year to year. For example, you wouldn't want to report your income in a cash accounting format one year and accrual accounting format the next. You'll also want to be sure to put the requested information on the appropriate line -- or the result can cause your support schedule total and its percentages to be incorrect.
Even if a not-for-profit is inactive, it must file a 990N form each year in order to maintain its not-for-profit status. Groups become inactive for a variety of reasons. In the past, there wasn't a formal requirement for groups to retain their status, but beginning in 2008, the IRS began requiring inactive organizations to complete the 990N to keep their not-for-profit status.And because the IRS scrutinizes new not-for-profit applications much more closely than it did 20 or 30 years ago, it's important for existing groups to file properly each year.
If a not-for-profit and another organization share more than 50 percent common board members or the not-for-profit retains more than 50 percent ownership of a for-profit entity, the IRS considers the second entity to be a related organization. The IRS defines this relationship as a related organization if the not-for-profit "exerts control" over the second entity, either through board membership or ownership interest.
Especially in a smaller not-for-profit organization, the grants made to other groups or individuals may be made with little fanfare and might be forgotten by the end of the year. The IRS requires not-for-profit organizations to list the name, address, EIN, amount of grant and in some instances may require citing the appropriate IRS code section, the grant's purpose or if the grant was noncash.
The revised 990 form requires organizations to not only provide employees' wages as shown in their W-2 earnings statement, but also to estimate non-tax benefits such as health benefits and pension programs that do not appear on the W-2. The IRS defines key employees as those employees who have "significant influence" or power similar to an officer, director or trustee.
The IRS asks not-for-profit organizations to classify income as related, unrelated and excluded from tax (IRS code 512, 513 and 514). Determining which category to classify a group's income can be tricky. The determination requires asking a series of questions and can sometimes lead to review of contracts made by the not-for-profit.
This article was originally published in Nonprofit World, November / December 2009 issue.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.
