Submitted by: Ralph Citino, CPA, Shechtman Marks Devor PC
As most exempt organizations know at all too well, preparing federal tax Form 990 can be a time consuming and complicated process. To help you have a better understanding of the form’s importance for both compliance and marketing, we have compiled a list of ten things to consider on a Form 990.
1. Good Governance: The IRS’s goals for Form 990 are increased transparency, good governance, and increased accountability for filing organizations. Form 990 requests information regarding an organization’s governing body and management, governance policies, and disclosure practices. Although federal tax law does not mandate these policies and practices, every organization is required to answer each question. Answering these questions “No” may be perceived negatively by the public because of an expectation that a prudently managed organization would have the following specified policies:
▪ Conflict of interest policy;
▪ Whistleblower policy;
▪ Document retention policy;
▪ Process for determining compensation;
▪ Joint venture policy.
Organizations that do not have these policies and procedures in place may want to implement them, even though not required by the IRS, to avoid potential public and potential donor misperception about their stewardship.
2. Review of the Form 990: An organization is not required by federal tax law to provide a copy of the Form 990 to its board or governing body, or to have them review the form before it is filed. However, the IRS believes board review is a fiduciary duty and encourages board members and executives of nonprofits to review and understand what is being filed each year. All organizations must answer on Form 990 about the organization’s process, if any, it used to review the Form 990.
3. Not All Tax-Exempt Organizations are Charities: There are more than 50 different 501(c) classifications that organizations can be depending on its purpose and activities. For example business leagues receive a 501(c)(6) designation, while social clubs receive a 501(c)(7) designation. 501(c)(3) organizations are exempt from federal income tax as charitable organizations. The major difference between charities and other tax-exempt organizations is that contributions made to charitable organizations by individuals and corporations are tax deductible. In addition, public charities may not be subject to some state and local sales tax. It is important to identify the type of tax-exempt organization, since the requirements on Form 990 differ for each type of organization.
4. Not All Income Earned by Nonprofits is Tax-Exempt: Even though an organization is recognized as tax exempt, it still may be liable for tax. The organization may be subject to unrelated business income tax (UBIT) if the activity is regularly carried on and is not substantially related to the entity’s exempt purpose. The primary purpose of UBIT is to put tax-exempt entities and “for profit” enterprises on equal footing with respect to their trade or business activities. Before entering into new business ventures, investments, and other activities it is important to consult with your tax advisor. In addition to UBIT an organization may be subject to the following taxes:
▪ State income tax;
▪ Local business taxes