How to Read a Not-For-Profit Tax Return How to Read a Not-For-Profit Tax Return
(Even if you are not a tax professional)
Part II
In a way, IRS Form 990 consists of two separate tax returns. The first is the “numbers” section (discussed in part I of this article) where organizations report their income and expenses for the year. In the second, organizations report how they comply with the many federal rules and regulations that govern the existence of not-for-profit entities. I think of this part as the “governance” section.
The governance section of Form 990 is densely packed with very technical information. We can still gather some useful information from this part of the tax return, however. Here, in part II, we will do a broad overview of the governance questions, take a quick look at the organization’s balance sheet, and discuss three of the most commonly filed sub-schedules.
Form 990, Pages 3 & 4
As you know, Form 990 consists of a 12-page main form and sixteen sub-schedules. Not all nonprofits have to file all the sub-schedules – just the ones that pertain to their operations. Pages 3 and 4 of Form 990 consist of a series of questions designed to determine which, if any, of the sub-schedules an organization is required to prepare. The language in these questions is very technical and you don’t need to read each one for these pages to be useful. Just scan the two pages looking for “yes” answers. Each yes will refer to a sub-schedule which in turn will give detailed information about how the organization operates. Following is a list of the Form 990 schedules and the purpose for each. Any schedules an organization is required to prepare will be attached in alphabetical order after the main form. Again, the schedules are fairly technical, but you can find out things like how much certain officers and directors are paid (Schedule J), whether the organization has personal or business ties with any of the individuals in the organization’s leadership (Schedule L), or what kind of non-cash donations the organization receives (Schedule M).
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Schedule
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Title
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Purpose
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Schedule A
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Public Charity Status and Public Support
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Filed by nearly all public charities, Schedule A provides information on what percentage of support comes from the general public and what amount comes from other sources. Schedule A is used to verify public charity status.
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Schedule B
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Schedule of Contributors
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Reports details about contributors who gave at least $5,000 to the organization during the year. The names of the donors are not disclosed on public copies of the tax return.
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Schedule C
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Political Campaign and Lobbying Activities
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Gives information on the organization's political or lobbying activities.
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Schedule D
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Supplemental Financial Statements
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Provides information on donor advised funds, art & museum collections, endowment funds, and other assets.
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Schedule E
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Schools
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Private schools use this form to disclose nondiscrimination policies.
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Schedule F
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Statement of Activities Outside the United States
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Reports information on the organization's activities outside the US during the tax year.
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Schedule G
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Supplemental Information Regarding Fundraising or Gaming Activities
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Provides information on large fundraising events or gaming activities such as raffles conducted by the organization. Also provides information on any professional fundraising services used by the organization.
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Schedule H
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Hospitals
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Provides information on the activities, policies, and community benefit provided by hospital facilities and other health care facilities
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Schedule I
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Grants and Other Assistance to Organizations, Governments, and Individuals in the United States
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When an organization provides grants and other assistance to US organizations, individuals, and governments, this schedule gives the name of the grantee, and the amount and purpose of the grant.
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Schedule J
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Compensation Information
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Reports compensation information for certain officers, directors, trustees, key employees, and highest compensated employees.
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Schedule K
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Supplemental Information on Tax-Exempt Bonds
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Filed by nonprofit organizations that have outstanding liabilities associated with tax-exempt bond issues.
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Schedule L
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Transactions With Interested Persons
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When an organization engages in financial or other business transactions with an interested or disqualified person, it must report the details of the transactions on Schedule L. The schedule is also used to determine whether a member of the organization's governing body is independent.
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Schedule M
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Noncash Contributions
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Many organizations receive donations of items other than cash such as works of art or stocks and bonds. If such donations exceed $25,000 in value in a year, Schedule M must be used to report what noncash assets were donated and what their value is.
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Schedule N
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Liquidation, Termination, Dissolution, or Significant Disposition of Assets
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Organizations that are going out of existence or disposing of more than 25% of their net assets must file this form to explain what happened to each asset that is no longer in use.
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Schedule O
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Supplemental Information to Form 990
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There's not a lot of room on Form 990 and the schedules to explain complicated matters, so Schedule O provides space to provide valuable information that doesn't fit anywhere else.
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Schedule R
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Related Organizations and Unrelated Partnerships
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A nonprofit organization that is a parent, brother/sister, or subsidiary of another organization is considered related to that organization. Transactions with related organizations are disclosed on Schedule R.
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Form 990, Part V, Pages 4 & 5
Form 990, Part V provides information regarding other tax forms an organization may be required to file with the IRS, as well as how the organization complies with the many rules that nonprofits must abide by. Here are a few items to check out on these pages:
- Line 1a – tells how many non-employees the organization paid for providing services to the organization during the year. If any single non-employee was paid over $100,000, the identity of this person must be disclosed on a statement in the tax return.
- Line 2a – tells how many employees the organization has. Compare this number to the total salaries and wages reported on page 10 for a data point on how the organization gets its work done.
- Line 5 – asks if the organization was a party to a prohibited tax shelter transaction during the year. If you see a yes here, that’s a big red flag.
Form 990, Page 6
Page 6, Section B, Policies, provides a list of “best practices” for running a nonprofit. It is not required that nonprofits answer yes to all these questions, but lots of yes answers indicate a well-run organization. On the other hand, mostly no answers indicate that the organization is being poorly run, a cardinal sin in my book.
Form 990, Page 11
Page 11 is the organization’s balance sheet. A balance sheet is a snapshot of an organization’s assets and liabilities at a single point in time - the last day of the organization’s tax year. The balance sheet must list all the organization’s assets (things of value that it owns) and all its liabilities (amounts it owes to third parties). In general, we want to see the value of the organization’s total assets on line 16 exceed its total liabilities on line 26. If liabilities exceed assets, the organization owes creditors more than it has resources to pay, a red flag.
Commonly Used Schedules
Schedule A – Public Charity Status and Public Support
One of the IRS requirements for granting public charity status is that the organization is or will be supported by many individuals rather than by a single or very few individuals. Public charities are expected to receive a large portion of their support from the general public or from governmental units. If a public charity’s income derived from the general public falls below one-third of their income, they can lose their tax-exempt status.
Schedule A calculates the percentage of public support an organization has received by averaging the sources of income over five years. All organizations required to file Schedule A must complete page 1 by checking the box that describes the reason for their public charity status. The organization can complete either page 2, Part II or page 3, Part III, but shouldn’t complete both.
Whichever page the organization completed, page 2 or page 3, look at the percentage reported in line 15. If the amount is higher than 33 1/3 percent, the organization continues to qualify as a public charity. If the amount falls below that percentage, the organization is in danger of losing its public charity, tax-exempt status.
Schedule B – Schedule of Contributors
In general, when any single donor contributes $5,000 or more to a charity during the tax year, their name, address, and amount donated must be reported to the IRS on Schedule B. There’s also a special rule for calculating which donors have to be listed, but we won’t consider that rule here.
Although a public charity has to give IRS information about generous donors, it does not, and should not, need to disclose this information to the general public. You can request a copy of any public charity’s Form 990, but if it contains a Schedule B, the only information you will see is the amount given, not the name or address of the donor.
Schedule O – Supplemental Information for Form 990 or 990-EZ
Form 990 requires an organization to provide a great deal of information in a relatively small amount of space. Sometimes organizations need more room to provide IRS with narrative information for responses to specific questions on the form. Rather than create separate attachments or statements for this information, the organization places it on Schedule O. For example, the line to describe the organization’s mission on page one of the 990 is pretty small, so many organizations continue this description on Schedule O. You may be annoyed to see that the description on page one stops mid-sentence and picks right up again on Schedule O, making it hard to get a cohesive answer to what the organization does or represents. This situation is generally a limitation of the tax software the preparer uses, rather than the conscious choice of the organization, so be kind with regard to the limitations of Schedule O!
Now you are an expert on using Form 990 to gather information about public charities! The Form 990 is full of important information about what a charity does and how it works. If you have any questions about the form or public charities in general, contact us – we would be happy to answer your questions.
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