Form 990 is an 11-page journey through the life story of your organization.
Welcome to installment #1 of your Back to Basics -- Know Your IRS Form 990. You are familiar with the Form 990, but do you really know what information you are giving on that Form? We intend this series of posts to explain the sections of the Form 990 and help you understand what and why the IRS is requesting information about your organization.
Unfortunately, some nonprofits look at the Form 990 as another nuisance item the government needs. This is the wrong way to view this compliance item. Look at your Form 990 as an opportunity to “toot your own horn” and tell the government and anyone viewing your Form 990 how great your organization is. This is a chance for publicity and marketing!
It is important to keep in mind -- as you are preparing the Form 990 -- that this is a key opportunity to paint a realistic and positive public image for your organization.
You need to respect the Form 990 as a marketing and informative forum. You are actually communicating with two major audiences: the public and the IRS. This is a chance for your organization to shine.
For the public, the IRS Form 990 shares with them the details of your mission and the projects and activities that support that mission. The Form presents significant details about your organization. Keep in mind, all the information on the Form 990 is public, and anyone can review it and form opinions about your organization from this data. The public is privy to your executive compensation and your expenditures for programs. Prospective donors and grantors may routinely view your Form 990 to ascertain the status of your organization before making a contribution or deciding on giving. Watchdog groups and the media also view your form 990 information.
And, of course the IRS is interested in knowing information about your nonprofit activities. You use the Form 990 to show that your organization still meets the qualifications to be tax-exempt. Click here to access the IRS page for Form 990.
Read our entire series Back To Basics--Know Your IRS Form 990.
Get started now. Here is Installment # 1.
Back to Basics -- Exploring Page One of Form 990
After 25 years of using Form 990, the IRS updated it in 2008. The present form will probably be around for many years. All nonprofits use this central reporting tool. The information on your Form 990 is the core of any annual report you may file with a state office or regulatory agency.
You need to view your Form 990 as a way to provide details that help the IRS and other state tax-exempt regulators administer the laws that govern not-for-profit organizations. Regulators determine from Form 990 whether the organization has been spending funds in a manner that would cause the government to withdraw charitable and tax-exempt status.
Additionally, the financial details on the Form 990 demonstrates the financial health of your organization, its strengths and weaknesses, and its sources of income.
The Form 990 is an 11-page journey through the life story of your organization. Added schedules and specific documents enhance the information. When you are done with the complete IRS Form 990, you may have a 30-40 page all-inclusive document.
The pages in the Form 990 contain many facts, but the first impression is always the most impactful. Page 1 sets the tone and grabs the attention of the reader. Page 1 is putting-your-best-foot-forward.
The first page summarizes your financial status.
Almost all viewers read the first page.
One of the first statements on Page 1 that jumps at you is the phrase “Open to Public Inspection.” This signals that the information on Form 990 is public. Your current Form 990 and those submitted over the last 3 years are available for public view. In fact, a member of the public can pay a fee and request copies of the information.
Since 1997, the National Center for Charitable Statistics and Guidestar post Form 990 data on the Internet. One day soon, the powers-that-be will require your organization to post its Form 990 electronically. This means that everybody in the world will have access to your organization’s data.
Page 1 also contains details regarding the official name of the organization, its address, the internal revenue code under which it is exempt, whether this is the organization’s initial return or the final return, and the organization’s website address.
Page 1, Part I provides a comment section where you “briefly describe the organization’s mission or most significant activities.” This is the perfect place to write a precise and easy-to-understand statement about your organization. Work on this statement and make sure it fits into the space provided. If you find you need more space, the place to provide the additional details is several dozens of pages after page 1. This information would appear in Schedule O. Thus, your chance to make a good first impression may be lost because few people will turn to the other page, and they will miss part of your story.
Part I, Question 2 asks if your organization has discontinued any operations or disposed of 25% or more of its net assets. A large change like this would have an impact on the organization and readers who are accustomed to dealing with considerably larger organizations.
Questions 3 and 4 relate to the size of your board and how many of the board members are independent of the board. It is a known fact that large boards do not function well. The best ratio for an efficient board is that 95-100 percent of the board members are independent of the board. Very large boards or boards with few independent member are not in your organization’s best interest.
Question 5 asks for the number of employees your organization employed during the year being reported. The IRS uses this information to verify annual payroll filings, and can use this data to decide if there is an audit requirement for benefit plans in place.
Question 6 asks for information on the numbers of volunteers to serve your organization. The IRS uses these facts to measure the amount of community support your organization gets beyond the amount of financial support it receives. This information is a major indicator of the financial health and importance of your organization in its community.
Page 1 Line 8 asks for the total of your organization’s revenues and expenses. The information you enter here comes from totals that appear on other pages of Form 990.
Lines 8 through 12 contain revenue amounts and break them into 4 classifications. Lines 12 through 17 break expenses into 4 types. Line 16 additionally designates fundraising expenses into professional fundraising and total fundraising expenses. The IRS closely inspects the amount of professional fundraising fees.
Many charity watchdog groups keep their eyes on your fundraising details. These groups work with a calculation of “fundraising efficiency.” To work this calculation, the watchdog groups use the amounts from Page 1 of Form 990. The fundraising efficiency calculation represents how much your organization spends to raise $1 of income.
This calculation uses data from line # 16b -- total fundraising expense is compared to Line # 8 -- total contributions. Dividing Line 16b by Line # 8 calculates the cost of raising $1. The inverse of this procedure is the fundraising efficiency.
For example if you organization’s fundraising expense on Line 16b is $296,000 and whose Line 8 totals are $1,500,000 shows an expense of 19.7 cents to raise $1 of contribution income and a fundraising efficiency of 80.3 percent. However, this calculation does not include grant income. Thus, this does not accurately show all fundraising efforts as grant writing as a fundraising expense.
Watchdog groups that monitor tax-exempt organizations and the financial press think that well-organized charities should have a fundraising efficiency of 65 to 75 percent. Because of these expectations, it is imperative you accurately report your organization’s amounts on these lines of Form 990.
Be aware that amounts for Lines 8 through 22 must be reported for the current year and the previous year. This helps the reviewer follow where your organization is moving. Individuals who follow your financial trends are looking to see if your organization has increasing or decreasing revenues. They are also looking to see whether expenses are moving in sync with the revenues.
Part 2 of Form 900 is the signature section where an officer of the organization signs. By signing, that person is assuming responsibility for the accuracy and completeness of Form 990. The signature indicates the signer has reviewed the Form 990 and finds it without errors.
The IRS does not like to find false information. Federal perjury laws can involve organizations that presente inaccurate information. Perjury is a felony that carries with it prison sentences for up to three years. This perjury would be a violation of the tax return perjury statute.
At the bottom of this page is the area for the signature, name, and address of the paid preparer. The paid preparer also signs the Form under penalty of perjury, yet the responsibility for the information on the Form falls to the officers of the organization. The fact that the organization has a paid preparer has a positive impact on the individual reviewing the Form 990.
Get ready to continue learning about the information in the IRS Form 990. The next segment prepares you for Page 2.
Now it is time for you to move to Part 2, Page Two of the Form 990. Keep moving on and tell yourself, “Knowledge is Power.” The more you understand about your organization’s IRS Form 990 the more you are in control of the outward image of your organization.
When you have questions about your IRS forms, contact TBFoster Accounting at trent@tbfosteraccounting.com to get your answers. We also invite you to keep in touch with the TBF Blog or join our nonprofit accounting group Nonprofit Accounting Spot.
Comments