Warning! Warning! Do not drive or operate any machinery or heavy equipment while reading this article. The reading of this article may cause sudden dizziness or sleepiness. A grande skim latte with a double shot of espresso is highly recommended before continuing. Why the warning? Because this month we are taking a look into the newly issued redesigned IRS Form 990 –Return of Organization Exempt From Income Tax. On December 20, 2007, the IRS redesigned these forms and organizations will begin using them for the 2008 tax year (returns filed in 2009).
The discussion is somewhat tedious, but imperative if you are working with or trying to work with the nonprofit sector. The importance of this should not be underestimated, since the 990 is not only the primary tax compliance tool for nonprofits, it is the leading source of information for regulators, policymakers, the media, donors, and you.
This is big news in the not-for-profit world since there has not been a change to this form in almost 30 years. While the form had not changed for three decades, the non-profit world has changed significantly in that time. Not only are nonprofits more complex, diverse, and competitive than thirty years ago, their donors are much more sophisticated and require greater transparency than 30 years ago.
The redesign of Form 990 is based on three guiding principles:
- Enhancing transparency to provide the IRS and the public with a realistic picture of the organization;
- Promoting compliance by accurately reflecting the organization’s operations so the IRS can efficiently assess the risk of noncompliance; and
- Minimizing the burden on the filing organizations.
Digesting the New Form
The new 990 is comprised of an 11-page core form and 16 schedules. It requires exempt organizations to provide considerably more information about their internal policies and practices than has been previously required, as well as information in a number of areas not addressed by the current form and greater detail than had been required in certain areas. The new core form allows an organization to describe its exempt accomplishments and mission up-front, thus The Statement of Program Service Accomplishments is moved to the front of the form.
The new version also provides more opportunities throughout the form for the organization to explain its activities. In addition, all questions regarding general activities and tax compliance are consolidated and executive compensation, governance, and other financial statement information sections are moved to the back of the form. Some examples of changes and new information required to be reported is as follows:
Governance. New governance questions request information about organizational policies, including those concerning conflicts of interest, whistleblowers, document retention, and joint ventures. The form also requests information about the composition and independence of the governing body, as well as governance practices such as documentation of board and committee actions, approval of compensation, and review of the Form 990. The section is broken down into three sub-parts: governing body, policies, and disclosures.
Compensation. The core form requests new information about compensation of directors, officers, key employees, and highly compensated independent contractors. The form clarifies that reported compensation should include W-2 or 1099 compensation. It should also include other compensation, including that received from related organizations. Compensation must be reported on a calendar-year basis even if the organization is a fiscal-year taxpayer.
Public Charity Status. Schedule A requests more detailed information concerning the basis for a 501(c) (3) organization’s public charity status, including additional information concerning supporting organizations. For publicly supported organizations described in Section 170(b)(1)(A)(vi) that do not meet the 33 1/3% public support test, the form requires an explanation of how the organization meets the 10% facts and circumstances test.
Supplemental Financial Statements. Schedule D requests detailed information concerning donor-advised funds; conservation easements; art, historical treasures, and similar assets; trust, escrow, and custodial arrangements; endowments; and investments.
Fundraising and Gaming. Schedule G solicits information about fundraising methods and gaming activities, as well as expenses associated with these activities.
Hospitals. Schedule H requires licensed hospitals exempt under Section 501(c)(3) to provide a description of the charity care and other community benefits they provide. Schedule H also requests information about community-building activities, bad debt, Medicare and collection practices, and transactions with management companies and joint ventures.