Form 990: Return of Organization Exempt from Income Tax

Form 990: Return of Organization Exempt from Income Tax

Form 990 is an essential annual filing required for non-profit organizations that are exempt from income tax under section 501(c)(3) of the Internal Revenue Code (IRC) or similar sections. It provides the IRS with a comprehensive overview of the organization’s financial activities, governance, and programmatic outcomes. The purpose of this form is to ensure that tax-exempt organizations comply with IRS rules and regulations and to maintain public trust in their operations.

In this guide, we’ll walk through the key aspects of Form 990, who needs to file it, what information is included, and how to ensure you file correctly and on time.

What is Form 990?

Form 990 is an information return that tax-exempt organizations, including charities, foundations, and other non-profit entities, must file annually with the IRS. The form collects a wide range of information about the organization’s finances, including its revenue, expenses, assets, liabilities, and executive compensation. Additionally, Form 990 offers transparency regarding the organization’s governance structure, programs, and charitable activities.

Form 990 is similar to a financial report card, providing both the IRS and the public with a snapshot of the organization’s financial health and its commitment to charitable purposes. This filing allows the IRS to verify that organizations continue to operate within the confines of their tax-exempt status.

Who Needs to File Form 990?

Most tax-exempt organizations are required to file Form 990 annually. However, there are exceptions based on size and type of organization:

1. Large Tax-Exempt Organizations: Organizations with gross receipts over $200,000 or total assets greater than $500,000 must file the full Form 990.

2. Small Tax-Exempt Organizations: If an organization has gross receipts of $50,000 or less, it may file Form 990-N, also known as the e-Postcard, which is a much simpler filing.

3. Private Foundations: These typically file Form 990-PF rather than the regular Form 990. However, some larger foundations may still be required to file the full Form 990.

4. Religious Organizations: While churches, synagogues, mosques, and other houses of worship are generally exempt from filing Form 990, some may choose to file voluntarily for transparency.

It’s essential for tax-exempt organizations to carefully assess their filing obligations and ensure they comply with the IRS requirements to maintain their tax-exempt status.

Key Sections of Form 990

Form 990 is a comprehensive document that requires organizations to provide in-depth financial and operational details. Below are the key sections:

1. Part I: Summary

This part of Form 990 provides a brief overview of the organization’s:

• Mission and primary activities.
• Revenue and expenses.
• Net assets or fund balances.
• A high-level summary of the governing body and program services.

2. Part II: Signature Block

This section confirms that the form is filed under the appropriate authority and that the information presented is true and complete. It requires the signature of an officer, such as the executive director or president.

3. Part III: Statement of Program Service Accomplishments

This section asks organizations to describe their programs and charitable activities in detail. It is essential for organizations to explain how their funds were spent and the impact of their work on the community.

4. Part IV: Checklist of Required Schedules

Part IV ensures that all required schedules and supporting documents are attached to the form. These schedules may include detailed financial information, governance disclosures, and other specifics about the organization’s operations.

5. Part V: Statement of Revenue

Here, the organization lists all sources of revenue, including:

• Contributions and donations.
• Program service revenues (e.g., membership fees, sales).
• Investment income (e.g., dividends, interest).
• Other income sources.

This section provides insight into the financial support the organization receives.

6. Part VI: Statement of Functional Expenses

This section breaks down the organization’s expenses into specific categories:

• Program services: Expenses directly related to the organization’s charitable mission.
• Management and general expenses: Overhead costs necessary for the functioning of the organization.
• Fundraising expenses: Costs associated with raising funds for the organization.

This breakdown helps the IRS and the public assess the organization’s financial efficiency.

7. Part VII: Compensation of Officers, Directors, Trustees, and Key Employees

In this section, the organization must report the compensation paid to its officers, directors, trustees, and key employees. This information is crucial for maintaining transparency, especially to ensure there is no excessive compensation or financial abuse.

8. Part VIII: Statement of Revenue from Program Service and Investment Income

Here, the organization reports detailed income from its program services, as well as investment income like interest or dividends. This helps the IRS track the sources of income and ensure that the organization is operating in line with its tax-exempt status.

9. Part IX: Balance Sheet

This part provides a snapshot of the organization’s financial position, listing:

• Assets (e.g., cash, investments, receivables).
• Liabilities (e.g., debts, accounts payable).
• Net assets (i.e., the difference between assets and liabilities).

This helps the IRS evaluate the financial stability of the organization.

10. Part X: Schedule of Investment Information

In this section, the organization reports information about its investments, including:

• Stock holdings.
• Bonds.
• Real estate.
• Other types of investments.

This section helps ensure compliance with the IRS rules regarding the use of investment income.

11. Part XI: Statement of Changes in Net Assets

This section provides a summary of the changes in the organization’s net assets during the reporting period. It tracks the inflow and outflow of funds, providing a clearer picture of the organization’s overall financial health.

Common Mistakes to Avoid When Filing Form 990

While completing Form 990, tax-exempt organizations should avoid several common mistakes that could lead to penalties or issues with their tax-exempt status:

1. Late Filing: Form 990 is due on the 15th day of the 5th month after the close of the organization’s fiscal year. Late filings may result in penalties.

2. Inaccurate Financial Data: Providing incorrect or incomplete financial data can lead to audit triggers. Make sure to review the revenue, expense, and asset figures carefully.

3. Omitting Required Schedules: Failing to attach necessary schedules can delay the processing of your form or result in a return being rejected.

4. Lack of Transparency in Program Services: Be detailed and clear in describing your program services. The IRS uses this section to assess the impact of your charitable work.

5. Not Reporting Executive Compensation Properly: Ensure that compensation for board members, officers, and key employees is accurately disclosed to avoid questions about excessive compensation.