Form 990: Schedule K, Supplemental Information on Tax-Exempt Bonds

Form 990 Schedule K: Supplemental Information on Tax-Exempt Bonds

Form 990, the annual information return for tax-exempt organizations, includes various supplemental schedules that provide additional insights into the organization’s financial activities. One of the most crucial of these is Schedule K, which pertains to tax-exempt bonds.

For organizations involved in issuing or holding tax-exempt bonds, Schedule K provides detailed information regarding the bonds’ terms, usage, and the financial implications for the organization. This guide will cover the purpose, filing requirements, and key components of Form 990 Schedule K.

What is Form 990 Schedule K?

Schedule K is an attachment to Form 990, used by certain tax-exempt organizations to disclose detailed information about their tax-exempt bond activities. The IRS requires this form to ensure transparency about tax-exempt bonds, which have become an essential financing tool for many nonprofit entities.

Tax-exempt bonds are bonds issued by a state or local government or nonprofit organizations that allow the issuer to receive a lower interest rate on the debt. In return, the issuer benefits from the tax-exempt status of the bond, which is a significant advantage over taxable bonds. These bonds are typically used to fund large capital projects such as hospitals, universities, or other public infrastructure.

The IRS Schedule K requires nonprofit organizations to provide detailed disclosures on the following aspects of the tax-exempt bonds they hold or have issued:

• General information about the bonds.
• Terms and conditions of the bonds.
• Use of bond proceeds.
• Debt service and financial obligations related to the bonds.

Who Needs to File Schedule K?

Not all organizations that file Form 990 need to complete Schedule K. Only those that have issued tax-exempt bonds or hold outstanding tax-exempt bonds are required to file this supplemental schedule. Specifically, an organization must file Schedule K if:

1. The organization is an issuer of tax-exempt bonds: This includes organizations that issue bonds to finance their activities or capital projects.

2. The organization holds tax-exempt bonds issued by another entity: If an organization owns or holds bonds that were issued by other entities for tax-exempt purposes, they must report those as well.

Additionally, Schedule K is only applicable if the organization meets the threshold for bond-related activities. These thresholds typically apply to organizations with outstanding tax-exempt bond issues totaling over a certain amount, generally above $100,000,000 in outstanding bonds.

Key Sections of Schedule K

Schedule K requires the organization to provide extensive information about its bond activities. The following are the main sections:

1. Basic Bond Information

This section requires the organization to report the basic details of the tax-exempt bonds:

• The name of the issuer.
• The bond type (such as fixed-rate or variable-rate bonds).
• The date of issuance and the maturity date.
• The amount of outstanding bonds at the close of the fiscal year.

2. Use of Bond Proceeds

In this section, organizations must disclose how the proceeds from the tax-exempt bonds have been used. This could include:

• Financing for capital projects (e.g., new buildings, renovation).
• Investment in program services or other mission-driven activities.
• The allocation of proceeds for debt refinancing.

The IRS uses this information to ensure that the bonds are being used for their intended tax-exempt purposes and that the organization is following all necessary regulations regarding the use of bond proceeds.

3. Financial Information

Organizations must also report detailed financial information regarding the debt service on the tax-exempt bonds. This includes:

• The total interest and principal payments made on the bonds during the fiscal year.
• Any outstanding balances or obligations related to the bonds.
• The terms of any guarantees or other agreements related to the bonds.

4. Compliance with Arbitrage Rules

Tax-exempt bonds are subject to arbitrage regulations, which are designed to prevent issuers from using the bonds to earn profits by investing bond proceeds in higher-interest investments. This section requires organizations to disclose whether they are in compliance with arbitrage rebate requirements, which are designed to limit the amount of interest income they can earn from bond proceeds.

5. Use of Proceeds and Private Business Use

The IRS requires that tax-exempt bonds be used for public purposes. Any use of bond proceeds for private purposes, such as leasing to private businesses, may result in penalties or the loss of the bonds’ tax-exempt status. Therefore, organizations must disclose any private business use of the bonds, including:

• Leases or contracts with private entities.
• Revenue generated by the use of bond-financed property for private purposes.

This section helps the IRS ensure that bonds continue to serve public interests, not private interests.

Importance of Schedule K

The filing of Schedule K is crucial for several reasons:

1. Transparency and Accountability

Tax-exempt bonds provide financial advantages to organizations, and the IRS requires transparency to ensure that these organizations are using the funds properly. Schedule K ensures that bondholders, donors, and the public have access to the necessary information regarding bond-financed projects and their outcomes.

2. Compliance with IRS Regulations

Filing Schedule K helps organizations remain in compliance with IRS rules governing the use of tax-exempt bonds. Failure to comply with these rules can result in penalties or the loss of tax-exempt status.

3. Accurate Reporting for Public Trust

Tax-exempt organizations must maintain the public’s trust. Providing detailed information about the issuance and use of tax-exempt bonds is essential for sustaining this trust and ensuring that funds are used appropriately.

Common Mistakes to Avoid When Filing Schedule K

As with any IRS filing, there are several mistakes organizations should be cautious of when completing Schedule K:

1. Incomplete Information: Failing to provide all required details about bond issuance, use of proceeds, or financial obligations can result in penalties or audits.

2. Failure to Disclose Private Business Use: Organizations must ensure that they correctly report any private business use of tax-exempt bonds. Failure to do so could trigger compliance issues.

3. Not Reporting Compliance with Arbitrage Rules: It’s essential to indicate whether the organization is in compliance with arbitrage rebate rules and other related regulations. Missing this information could lead to IRS scrutiny.

4. Late Filing: As with the main Form 990, Schedule K must be filed on time to avoid penalties. Be sure to meet the filing deadlines.

Conclusion

Schedule K of Form 990 plays a critical role in ensuring that tax-exempt bonds are being used properly by nonprofit organizations. By providing detailed information about the issuance, use, and compliance of these bonds, organizations can demonstrate their commitment to transparency and remain in compliance with IRS regulations.