Nonprofit organizations that depend on generous grants and individual contributions to finance operations might wonder why a tax return needs to be filed since nonprofits are tax-exempt.
What would happen if the return is not filed? Danger Will Robinson! You could lose your exempt status!
Filing a timely 990 tax return provides the IRS with annual information about your nonprofit and whether or not your organization is still in compliance with IRS rules regarding tax exemption status. If you fail to file for three years in a row, the IRS can revoke your tax-exempt status, you can receive a huge tax bill, and you may be disallowed from receiving future charitable contributions. This article walks you through the basics of the 990 form, including when to file, which form to use, and how to file.
When to file: 501(c)(3) public charities and private foundations should file by the 15th day of the fifth month following the end of your organization’s fiscal year. For most organizations, this tends to land on either May 15th or November 15th. An automatic 6-month extension can be filed without penalty using IRS Form 8868.
What form to use: (See www.irs.gov/charities-non-profits.)
- 990-N is an e-postcard for smaller nonprofits with revenue of $50,000 or less.
- 990-EZ is for mid-sized nonprofits with revenue greater than $50,000 but less than $200,000.
- 990 is for larger nonprofits with revenue of $200,000 and over or total assets of $500,000 or more.
Purpose of the Annual IRS Return: The IRS wants an annual report of your mission statement, programs, and finances. They will also look at key elements regarding compliance with various IRS rules for charities, some of which are highlighted below.
Key Elements of the 990, 990-N, and 990-EZ:
- Open to Public Inspection – These words are printed on the top of the first page. They mean anyone can request a copy of your 990 from the IRS. Furthermore, the IRS requires that your 990 be available at your office (local and regional offices) for anyone to review. The best way to do this is to post it on your website in PDF form for the three most recent years filed. An organization called Guidestar.org provides free information about all 501(c)(3) organizations and will post 990s on the site. The 990 is a great document to provide your donors with information about your charity and is often required information when applying for a grant.
- Current Finances – These items include revenue, expenses, change in net assets, and balance sheet items. This section should generally match your agency year-end financial statements, with a few items that may need to be reconciled to match the IRS format.
- Mission and Program Accomplishments – In this section of the form, the IRS wants to know how you are using public funding.
Key Elements of the 990 and 990-N:
- Board Members – The name and title of each board member and officer is listed along with their average weekly hours worked. Any compensation must be listed.
- Salaries/Compensation over $100,000 – For larger nonprofits, this is usually for top management staff such as CEO, CFO, or COO. The names, titles, and salaries and weekly hours worked are listed. Independent contractors if paid over $100,000 must also be listed following the staff section. This is to ensure that the pay is “fair and reasonable” and not excessive.
- Informational and Status Questions – There are about three pages of questions in the 990 form that may be needed regarding tax compliance and management policies. Three very notable questions in the management and policy section ask if the the organization has a conflict of interest policy, whistler blower policy, and a document retention schedule policy. These are good policies for larger organizations to have, and the IRS is testing for sound management practices. Even though these policies are not required by the IRS, the policies could be used to review the organization for noncompliance issues. Again, the public can also view your answers to the questions.
- Schedule A – Public Charity Status and Public Support – This is a critical section that requires that all contributors who donated $5,000 or more be listed. Additionally, a somewhat complicated rolling 5-year test must be performed to determine that individual donors did not contribute excessive amounts (over 2 % of total revenue) that would reduce general public support to less than 33.3% of total revenue.
As an example, if an organization had total contributions of $100,000 from public foundations, government grants, and individual donors, but $80,000 came from one private individual, the nonprofit would probably not meet the test of being a publicly supported organization and would lose tax-exempt status. The guidelines for 990 Schedule A explain how to calculate this in detail. The best defense against losing exempt tax status and being classified as a publicly supported charity is to have a broad diversity of fees and contributions.
Where to file: It’s important to file annual returns on a timely basis and not assume that your nonprofit is exempt from filing a return just because it is exempt from paying federal taxes. This site will guide you regarding how and where to file: https://www.irs.gov/charities-non-profits/annual-filing-and-forms.
Finally, filing organizational tax returns are not for the faint of heart! Ask your Certified Public Accountant for help if your CFO or Accounting Manager is unfamiliar with filing 990s.
Deanna Euritt is the principal consultant of VistaConsulting, providing management services to help build stronger nonprofits in Northern California. Deanna has over 30 years of experience in government and nonprofit organizations. She is a former CPA with a Bachelor of Science in accounting and a master’s degree in theology. She has served as an auditor, human resources director, program manager, and executive director in medium and large nonprofit organizations. Deanna may be reached at DEuritt@gmail.com or via her website www.VistaConsulting.org.