While many non-profit organizations may be exempt from income taxes, they are not exempt from the federal government’s recordkeeping requirements. Among those requirements are tracking revenues and expenses and reporting those items to the Internal Revenue Service (IRS) by way of Form 990. The requirement applies to organizations as small as the local Little League affiliate or as large as a major hospital.
For small volunteer organizations, recordkeeping and form filing can be burdensome and frustrating. However, these tasks are necessary and can be useful. Most importantly failure to file a Form 990 for three years results in the automatic revocation of exempt status. Reinstatement can be costly, even under the expedited process implemented in 2014 by the IRS. For a small organization, reinstatement can take a substantial bite out of its bank balance.
Very small organizations, those with less than $50,000 in annual revenue, only need to file a Form 990-N. Filling out this postcard-sized form is a simple task with big implications which should be formally assigned to a particular position, such as the president or treasurer. Since the majority of these organizations are volunteer groups, it is easy for someone to forget about the due date. A good practice is to have two of the organization’s officers mark the 990-N due date on their calendars to ensure it is not forgotten. It is better to double check that the form was filled out and filed than to incur the consequences of a missed deadline.
In general, the Form 990-EZ may be filled out for organizations with annual revenue between $50,000 and $200,000 with assets less than $500,000. For most other organizations that do not fall into one of the aforementioned categories, a Form 990 must be completed and sent to the IRS. The Form 990 is a public document that an organization must make available to anyone who inquires. Many organizations make the Form 990 “available upon request” or post it to their website. GuideStar, a data collection website for non-profits, posts 990s on their site. The 990s come from two sources: the IRS and the organizations themselves. The GuideStar database contains more than five million Form 990 images provided by the IRS, with new images arriving from the IRS monthly. 501(c)(3) organizations registered in Massachusetts must also include Form 990 as part of their annual filings with the Attorney General’s office. These forms are posted on the Attorney General’s website. Many potential donors research GuideStar and other websites to determine what organization(s) to support.
The Form 990 not only serves public purposes, it can serve organizational purposes as well, allowing board members, donors and others access to information about an organization’s financial management, operations and governance. It is a tool-a research document-for understanding your organization, its strengths and its weaknesses.
The information provided within the different parts of the form displays an organization’s mission, provides a look at how the organization’s cause is funded, indicates who leads that cause and what it costs to deliver on the mission’s promise. This information is provided in Parts III, VII, VIII, IX and X, which focus on an organization’s financial data, and through a series of questions included in Parts V and VI.
Most non-profit organizations seek contributions and grants as a source of support for their operations. For many, these sources are critical for survival. In the aftermath of the 2008-2009 recession, many corporations, foundations and individual donors have tightened their belts, increasing the competition for funding. These entities have less money to distribute in the current low-interest rate environment. The answers which your organization provides to the questions in Parts V and VI can shed a positive light among potential donors and set your organization apart from other organizations competing for the same charitable dollars. The Form 990 can also be used to compare your organization to other non-profits.
First, look at your organization’s mission statement. Does it adequately describe the services you provide or is it overly general? How does your statement compare with those of organizations of a similar purpose? Will the statement prompt a potential donor to give to your organization? It is also important that the organization’s mission statement reported on the 990 be consistent with the overall exempt purpose of the organization.
Schedule A of Form 990 will show your percentage of public support. Do you have a broad source of contributors? How does the amount from each revenue source compare with that of other organizations? Are there classifications of support present for other organizations that are missing from yours? Is your organization nearing the threshold that would change its status from a public charity to a private foundation?
Part VII reports all officers and your organization’s highest paid employees. As an organization, this part may be used to compare itself against other organizations of a similar size and focus. Additionally some donors make similar comparisons in choosing where to direct their philanthropic endeavors.
The revenue schedule in Part VIII is also worth a review. What is the percentage of unrelated business revenue in comparison with total revenue? Is the revenue nearing a threshold that could threaten its exemption status? How does the percentage of unrelated business revenue compare with similar organizations? Do other organizations have revenue sources that could be available to your organization? The data located here may help you evaluate and fine tune this area of your operations.
Part IX of Form 990 is where expenses are reported. These expenses are categorized as to both nature and function. A key factor for organizations in the nonprofit sector is the percentage of expenses attributable to administration and fundraising. Potential contributors want to see that a large amount of their support is going to support an organization’s programs, not to administration and fundraising. Additionally, to be eligible for some grants and federal campaigns, there are set maximums for the percentage that an organization can have for administration and fundraising. Large organizations may find industry statistics available that can indicate percentages for management and general expenses. For organizations with less common missions, looking for organizations of a similar size may be the best way to evaluate your efficiency. Examine both the percentage and dollar amount of expenses attributable to administration. You should also look at fundraising expenses relative to fundraising revenue. Is the amount spent on fundraising generating significant contributions? The data you obtain from comparing your organization’s expenses with other organizations may enlighten you as to steps you can take to improve the way your organizations spends those limited resources.
While filling out a Form 990 may be a requirement of the IRS, it can become a very useful tool for your organization. So, once your Form 990 is complete, do not just file your copy in a drawer until it is time to prepare next year’s form. Make the Form 990 work for you. Use the data to compare your organization to similar groups. Chances are that you will find ways to make your organization more efficient, attract more donors, and be better able to fulfill your mission.
Disclaimer: Under U.S. Treasury Department guidelines, we hereby inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service (or state and local or other tax authorities), and (2) no part of any tax advice contained in this communication is intended to be used, and cannot be used, by any party to promote, market or recommend any transaction or tax-related matter(s) addressed herein without the express and written consent of Blum, Shapiro & Company, P.C.