February 2008
The New Form 990: What It Means For You — Today!
Tax-Exempt Organizations Update February 2008 - Printable PDF

Elaine Wilson

On December 20, 2007, the IRS released the new version of the Form 990 — its first major redesign of the Form since 1979. Any organization that files the Form 990, which includes most Section 501(c)(3) organizations as well as most other organizations that are tax-exempt under Section 501(a), will find many changes and challenges ahead. These changes do not currently apply to private foundations, which file the Form 990-PF and not the Form 990.

Although the date for filing the new Form 990 may be many months away, organizations need to start planning for the new Form today. Over the next year, any organization that files the Form 990 should review the manner in which it keeps its books, in order to capture the appropriate information to be able to prepare the new Form. In addition, the IRS now asks for information on many policies and procedures. Filers should review their operations to make sure they can respond to these new policy questions appropriately. The following discusses some of the changes in the Form 990 that should cause organizations to start taking steps now, to be in the best position to complete the Form appropriately when the time comes.

The new Form consists of an 11-page "core" form, to be completed by each filer, and 16 different schedules designed to gather specific information in particular areas. Each organization must complete only the schedules relevant to it. These new schedules are as follows:

Schedule A	Public Charity Status and Public Support
Schedule B	Schedule of Contributors
Schedule C	Political Campaign and Lobbying Activities
Schedule D	Supplemental Financial Statements
Schedule E	Schools
Schedule F	Statement of Activities Outside the United States
Schedule G	Supplemental Information Regarding Fundraising or Gaming Activities
Schedule H	Hospitals
Schedule I	Supplemental Information on Grants and Other Assistance to Organizations, Governments, and Individuals in the United States
Schedule J	Compensation Information
Schedule K	Supplemental Information on Tax Exempt Bonds (IRS' form)
Schedule L	Transactions with Interested Persons
Schedule M	Non-Cash Contributions
Schedule N	Liquidation, Termination, Dissolution, or Significant Disposition of Assets
Schedule O	Supplemental Information to Form 990
Schedule R	Related Organizations and Unrelated Partnerships

 

 

 

 

 

 

 

 

 

 

 

 


We note that the IRS plans to issue draft instructions for comment, possibly issuing a segment at a time, and to finalize them by this summer. To the extent that there are unanswered questions about the new Form, many of them may be answered in those instructions.

Bookkeeping Changes
Throughout the new Form 990, there are new categories and allocations for financial information. CFOs, controllers, and bookkeepers will need to examine the new Form 990 thoroughly in order to determine any changes they need to make in how they keep the organization's books. The following highlights some of the areas where financial information will be reported in new categories or in new detail, which may necessitate changes in the way financial information is handled.

Expenses and Revenues. The revenue and expense information requested in the new Form 990 is similar to that requested in the current Form, but in some instances that information has been reformatted or new categories have been added. Total revenue must now be allocated among exempt function income, unrelated business revenue, and income excluded from unrelated business income tax. Section 501(c)(3) and Section 501(c)(4) organizations must continue to allocate expenses among program services, management, and fundraising; however, other filers need not make these allocations.

Balance Sheet. The balance sheet in the current Form has been included, relatively unamended, as Part X of the new Form 990. One notable change to the new balance sheet is that there is now a specific line item for program-related investments, which used to be reported on the "other assets" line. The most significant change in the balance sheet comes not from the Form itself but from the additional information that needs to be supplied regarding the filer's assets. In the new Form, the filer must provide additional information in the new Schedules regarding specific assets (e.g., Schedule L, with respect to loans to or from disqualified persons). Schedule D requests information on various investment assets, including land held for investment, investments in non-publicly traded securities, and program-related investments. In some instances, these investments can be grouped by category (e.g., there is one line item for all closely held equity interests), but other investments may need to be broken down with more specificity (e.g., "publicly traded securities for which over 5% is held by the organization").

Financial Statements. A new Part XI of the Form 990 asks whether the organization's financial statements were compiled or reviewed by an independent accountant or audited by an independent accountant and, if so, if there is an audit committee. The federal tax law does not require a nonprofit to have audited financials or an audit committee. Some states, such as Illinois and Wisconsin, do have audit requirements for charities that solicit or have revenues over given amounts annually; some states, such as California, have broader requirements; and many states do not have any audit requirements. Accordingly, there is no "right" answer to these questions, and none should be implied from the inclusion of the questions on the Form. In addition, in new Schedule D, organizations with audited financial statements are required to reproduce the footnote to their statements regarding their potential liability for income taxes under the accounting rule known as FIN 48. The final section of Schedule D contains the reconciliation between an organization's audited financial statements and the balance sheet and revenue in the core form.

Public Support Tests and Schedule A. In the current Form 990, all public charities must file Schedule A, which covers a variety of topics. The new Schedule A covers only an organization's qualification as a public charity under Section 509(a). All Section 501(c)(3) organizations must complete the new Schedule A, but all other organizations can omit this Schedule.

In the current Form 990, there is one public support table for both Section 170(b)(1)(A)(vi) and Section 509(a)(2) organizations. This can prove confusing at times, as the table requests information and provides for calculations that may not be necessary for a particular organization's public charity test. The new Form 990 divides the public support test into two separate tables. A close review of the public support tables reveals some changes that will ultimately require regulatory amendments. The current public support tests are performed over a four-year period. The public support tables in the new Form are able to measure support over five years, including the current tax year. The IRS has indicated that it hopes to move to a five-year measuring period, but this will require changing the regulations under Sections 170 and 509.

Finally, there is a significant accounting change in the new public support tables. Previously, organizations were required to complete the public support table on a cash accounting basis, even if the rest of the Form 990 was prepared on an accrual basis. The new Form 990 will require the public support table to be prepared using the same method — cash or accrual — as the rest of the return.

Donor Advised Funds, Endowments, Trusts and Like Assets. New Schedule D requests new information about specific assets such as donor advised funds, conservation easements, art collections, trust escrow and custodial arrangements, and endowment funds. In each area, there is specific reporting regarding the value of the assets and other details. Any organization maintaining these types of accounts or assets will need to review these areas of the new Form to make sure that they are able to gather the appropriate information.

Fundraising, Special Event, and Gaming Revenues. New Schedule G is required for organizations with more than $15,000 in professional fundraising expenses or more than $15,000 in special event or gaming revenue. An organization must list all professional fundraisers that received compensation of over $5,000, including the gross receipts brought in by the fundraiser and the net receipts turned over to the organization. It also requires a listing of all states in which the organization is registered to solicit contributions. (The current Form 990 only requires a list of states where the organization files its Form 990.) Special event revenues and costs are now broken down on an event-by-event basis. Gaming activities are categorized by game (bingo, pull tabs, and other gaming.) There is a series of questions regarding the manner in which games are run, specifically including state law compliance issues.

Foreign Activities. Schedule F to the new Form 990 requests new information regarding the foreign operations of domestic exempt organizations. This new Schedule is not limited to Section 501(c)(3) organizations — it applies to all tax-exempt filers — but is only required of organizations that have foreign activities with expenses or revenues in excess of $10,000. Foreign activities are broken into three areas: direct activities, grants to foreign organizations, and grants to foreign individuals. In the direct activity area, organizations will be required to report on officers, employees, activities, and expenditures by "region." Organizations making grants to foreign organizations will need to list the purpose and amount of each grant by region as well as the manner of cash disbursements and the amount of any non-cash assistance. This section also asks if grant recipients are tax-exempt under their domestic law or whether the filer has an equivalency determination on file for the grantee. Organizations making grants to foreign individuals will need to report similar information, although the organization need not reveal the identities of recipients due to security concerns. Finally, Schedule F requires "grantmakers" to report on their policies and procedures for awarding and monitoring foreign grants.

Non-Cash Contributions. Given the focus on charitable deduction fraud issues over the last few years, it is not surprising that new Schedule M requires detailed reporting on non-cash charitable contributions received during the year. This Schedule applies to all tax-exempt organizations, not just Section 501(c)(3) filers. Non-cash contributions need to be broken down by type (including categories such as taxidermy and archeological artifacts). The filer must explain how the value of the item was determined for purposes of including it in the organization's revenues for the year. In addition, Schedule M asks a number of questions regarding the organization’s gift acceptance and tracking policies. It also asks how many Forms 8283 the organization received from donors for the year, a number that most organizations do not currently track. Finally, organizations must report any contribution that is subject to an agreement not to dispose of it for at least three years and which is not used for the exempt purposes of the organization.

Related Entities. On new Schedule R, the filer must identify any disregarded entities (primarily single-member LLCs), related tax-exempt organizations, related organizations taxed as partnerships, related organizations taxed as corporations, and unrelated organizations taxable as partnerships (although the draft instructions indicate that investment partnerships should be excluded). Once these entities have been identified, the filer must then determine whether there has been a transaction with one of those entities, including grants, sales, loans, capital contributions, performance of services, reimbursement of costs, or employee-sharing arrangements. Many organizations that have affiliated entities (Section 501(c)(3) and Section 501(c)(4) affiliates, for example) share expenses, space, and employees on a regular basis. While this is common, not all affiliated organizations have in place arrangements regarding the manner in which these costs should be shared. All organizations should review transactions they have with their affiliated entities, to make sure that such arrangements are in place and are documented to the extent appropriate.

Reporting Compensation.
The IRS requires compensation information to be reported on Part VII of the new Form. In addition, the new Form includes expanded compensation reporting on Schedule J in certain circumstances. New Part VII requires the organization to list compensation information for a variety of individuals. All compensation information must be reported based on the most recently filed Forms W-2 and 1099, even if the filer operates on a fiscal year that does not end on December 31.

Each of the organization’s current officers, directors, trustees, and key employees, regardless of the amount of compensation paid, must be named on the core form. The filer’s five highest-compensated employees (other than officers, directors, trustees, or key employees) must also be listed. A "highest-compensated employee" is one who received a total of more than $100,000 in compensation. The filer must also list each of its former officers, key employees, or highest- compensated employees who received a total of more than $100,000 in reportable compensation from the organization and any related organization. Finally, the organization must list each of its five highest-compensated independent contractors, which are any contractors that received more than $100,000 in compensation. (We note that Form 990 is a popular place for small organizations to find comparable compensation information. By increasing the reporting floor from $50,000 in the current Form 990 to $100,000, it may now be even more difficult for small organizations to find good information for compensation due diligence.) For each individual named on the core form, the filer must identify the average hours worked per week for each individual, the reportable compensation stated on the individual’s most recent Form W-2 or 1099 from the filer and any related organization, and the estimated amount of "other compensation" received from the filer and any related organization.

If the organization lists any former officers, directors, trustees, key employees, or highest-compensated employees, or if any individual listed received more than a total of $150,000 in compensation (both reportable and "other compensation") from the organization and any related organization, Schedule J must be completed. Finally, if any listed person also received compensation from any unrelated organization for services rendered to the reporting organization, Schedule J must be completed. Schedule J requires comprehensive reporting for listed individuals, including total compensation and then a breakdown of that compensation by category. The filer must specifically indicate whether it paid or reimbursed a listed individual for any of the following: first-class or charter travel, travel for companions, tax indemnification and gross-up payments, discretionary spending accounts, housing allowances or residence for personal use, payments for business use of personal residence, health or social club dues or initiation fees, or personal services (e.g., maid, chauffeur, or chef). The organization must also state that it follows a written policy regarding the payment or reimbursement of such items or explain why it does not follow such a policy. It must also indicate whether it requires substantiation prior to paying such expenses. The IRS has indicated that de minimis fringe benefit payments and expense reimbursement payments will not need to be disclosed.

An organization will be required to describe its compensation policies and procedures. With respect to compensation of top officers and key employees, the filer must report whether its process included approval by independent persons, comparability data, and contemporaneous substantiation of the decision. The organization must specifically identify the procedures and comparability data used in establishing compensation for the organization’s CEO/Executive Director.

Governance Issues
Through Part VI of the new Form, the IRS requires each filer to disclose certain governance information such as the composition of its governing body, the existence and content of certain policies and procedures, and whether (and if so, how) the organization promotes transparency and accountability to its beneficiaries. The filer must provide the number of voting members of its governing body and how many voting members are independent (presumably meaning members that are not compensated by the filer or related to anyone who is). In addition, the new Form asks about any family or business relationships between its officers, directors, trustees, and key employees. Each organization must now disclose whether the organization delegated control over management duties to a management company or other person. If the filer has members, it must disclose whether the organization’s members or other persons may elect members of the governing body and whether any decisions of its governing body are subject to the approval of its members or other persons. The new Form also asks whether the organization contemporaneously documents the meetings of its governing body and whether members of its governing body have reviewed the Form 990 being submitted. Part VI of the new Form then asks whether the organization has various policies, including a conflict-of-interest policy, a whistleblower policy, a compensation policy, a document retention and destruction policy, and an investment policy.

Many of these policies and practices are not required by the federal tax laws, but the IRS believes they may indicate whether the organization has adequate internal controls. The IRS believes that the existence of an independent governing body and well-defined management policies increases the likelihood that an organization is operating in compliance with federal tax law. Thus, while there is no federal tax law requirement that an organization have many of these policies, an organization that reports that it does not have them may find it is a more likely target for an audit.

With respect to the conflict-of-interest policy, the filer must disclose whether the policy is regularly and consistently monitored and enforced, and whether conflicts must be disclosed at least annually. A conflict- of- interest policy that tracks interested party dealings will be especially important, as new Schedule L asks a number of questions regarding transactions with "Interested Persons." Schedule L applies to all reporting organizations, not just Section 501(c)(3) and Section 501(c)(4) filers. The new Schedule L first requires Section 501(c)(3) and Section 501(c)(4) organizations to report any excess benefit transactions that may have occurred. The balance of Schedule L requires all organizations to report loans, grants, and business transactions involving Interested Persons. In the loan reporting area, the IRS specifically asks if the loans were approved by a governing body and whether they are documented in writing. In the grant and business transaction area, the amount and purpose must be disclosed as well as the relationship of the Interested Person to the organization.

A filer must also report whether it participated in a joint venture with a taxable entity during the year. If so, the organization must report whether it adopted a written policy requiring it to evaluate its participation in joint ventures under the tax laws and to take steps to safeguard its exempt status.

Reporting by Specific Organizations and Activities

Supporting Organizations. Supporting organizations will be subject to more thorough reporting on the new Schedule A to the Form 990. The Pension Protection Act of 2006 imposed a variety of new requirements on supporting organizations. The 2007 Form 990 required disclosure of the type of supporting organization, the identity of the supported organizations, and the amount of support provided. In the new Schedule A, supporting organizations will also need to report whether they have notified their supported organizations of their support, whether any of their supported organizations are foreign, and whether any individuals in a position of control, or their affiliates, have made gifts to the supporting organization.

Hospitals. On new Schedule H, hospitals must provide detailed information regarding their charity care, community benefit activities, and other exempt purpose functions. The IRS has indicated that it may define an organization as a hospital by reference to state licensing or certification. The IRS may also require other Section 501(c)(3) organizations that provide hospital or medical care to complete Schedule H. The IRS believes that the additional reporting burden necessitated by this Schedule could be substantial for many hospitals, particularly for the first year of reporting. As a result, the new disclosure requirements are phased in, with only one part of Schedule H being mandatory in 2008. For tax years commencing in 2009, the entire Schedule H becomes mandatory.

A hospital must disclose the charity care and other community benefits provided by the hospital. Schedule H requests information about charity care and "means tested" government programs as well as other community benefits. Additionally, the Schedule asks about the hospital’s community-building activities, including physical improvements in housing, economic development, community support, environmental improvements, leadership development and training, coalition building, community health improvement advocacy, and workforce development. A hospital must also report specific information on its treatment of bad debt expense; Medicare revenue and costs, including any surplus or shortfall; and information as to the hospital’s debt collection policy. Hospitals must disclose any management companies or joint ventures in which a hospital has ownership of 10% or more. Finally, the Schedule requests certain special information from critical access hospitals, children’s hospitals, research facilities and teaching hospitals.

Tax-Exempt Bond Issuers. New Schedule K requires organizations to provide annual information about each tax-exempt bond issued after December 31, 2002, with a principal balance of more than $100,000 outstanding. Organizations must first supply identifying information about each series of tax-exempt bonds outstanding, such as the name of the issuer, CUSIP number, date of issue, and purpose of the issue. The Schedule then asks for detailed information concerning the use of bond proceeds, including (i) the amount of proceeds held in reserve funds and escrows, (ii) the amount of proceeds spent on capital expenditures and working capital, (iii) the date of substantial completion of any project, (iv) whether proceeds were used for an advance or current refunding, (v) whether the final allocation of the use of bond proceeds has been made, and (vi) whether the organization maintains adequate records to support the final allocation of proceeds. To provide some transition relief, the IRS will require organizations to provide only the identifying bond issue information for tax year 2008. The balance of Schedule K is optional for 2008 but will be required beginning with tax year 2009.

Organizations must disclose information regarding the private use of the financed facilities. The Schedule asks whether there are management or research contracts affecting financed property, if the organization regularly engages bond counsel to review contracts relating to the financed property, and if the organization has adopted procedures to ensure post-issuance compliance. Organizations must provide the percentage of financed space used by anyone other than a Section 501(c)(3) organization or a state or local government and the percentage of financed space used in an unrelated trade or business. In addition, the Schedule requests certain arbitrage information, including (i) details of any contracts with respect to the bond issue, (ii) the name of any arbitrage provider, and (iii) whether any exceptions to rebate were applicable.

Effective Dates and Filing Relief
The new Form 990 is generally in effect for tax years beginning in 2008, to be filed in 2009. In order to alleviate the administrative burden on smaller organizations, certain organizations may choose instead to file Form 990-EZ for the next two years. For 2008 returns filed in 2009, organizations with gross annual receipts between $25,000 and $1 million, and total assets below $2.5 million, may file Form 990-EZ. For 2009 returns filed in 2010, organizations with gross receipts between $25,000 and $500,000, and assets below $1.25 million, may file Form 990-EZ. After 2010, the Form 990-EZ should be available for organizations with between $50,000 and $200,000 in gross receipts and assets below $500,000. Organizations below $50,000 in gross receipts (or below $25,000 prior to 2010) may file the new "e-postcard" filing, the Form 990-N. Organizations that do not qualify for Form 990-EZ will need to file the full new Form 990.

Quarles & Brady Comment
Many tax-exempt organizations, especially large organizations with sophisticated operations, have a great deal of work to do over the next year. Even smaller organizations will find themselves with many items to accomplish in order to comply with these new reporting requirements. A more detailed discussion of some of the changes in the new Form 990 will be available on the Quarles & Brady website at www.quarles.com/publications. The new Form 990 itself, as well as IRS comments on the Form, can be found at http://www.irs.gov/charities/index.html. Over the coming year, Quarles & Brady will work with its tax-exempt clients to help them make the transition to reporting on the new Form 990. We welcome any questions you might have or any thoughts on how we can make this transition easier for you.

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This update is intended as a general summary of legal matters and not as specific advice to any particular client. If you have any questions concerning the subject matter of this update, please contact the primary author of this update, Elaine Waterhouse Wilson, at (312) 715-5141 / , or your Quarles & Brady attorney.