A question we often hear from our clients is “Why are you asking me so many questions?” The short answer is that the Form 990 is a complex tax return. In fact, the 990 requires more information than many for-profit tax returns. There is high threshold of accountability to ensure that the nonprofit is truly operating in a tax-exempt manner. As such, there are a large number of questions and disclosures, both numerically and operationally, that must be completed on the Form 990.
Below you will find a breakdown of each part of the Form 990 explained to provide some insight on what is required as part of the Form 990 preparation.
Part I: Summary
This initial section summarizes content from other sections of the return for ease of review.
- Activities & Governance: Provides information about the mission, activities, number of board members, employees, and volunteers, and the amount of unrelated business income.
- Revenue: Summarizes income from donations, programs, investments, and other sources. This section shows a comparison between the current and prior tax year.
- Expenses: Summarizes expenses by major line item, such as grants paid, compensation and benefits paid, fundraising fees, and “Other Expenses,” which is a catch-all for all other expenses on this summary. Prior tax year data is included here, too, for comparison.
- Net Assets or Fund Balances: Shows the cumulative net difference between income and expenses.
Part II: Signature Block
Here are lines for the signature of a principal officer, as well as space to list the professional preparer’s information. The IRS requires all Form 990 filings to be electronic.
Part III: Statement of Program Service Accomplishments
This section provides space for a nonprofit to give details about what the organization accomplished programmatically within the current year.
- Provide an expanded version of the nonprofit’s mission.
- Questions regarding whether any new programs were launched during the tax year.
- Space is provided to detail specific accomplishments in the organization’s three largest programs, including the total amount of revenue and expenses directly associated with each.
- Additional program accomplishments can be detailed on Schedule O.
Part IV: Checklist of Required Schedules
This section is comprised of 38 Yes or No questions, some with sub-questions, covering a wide variety of topics. If a question is answered yes, it usually requires a certain Schedule be completed to provide additional detail and disclosure regarding that question.
Part V: Statements Regarding Other IRS Filings and Tax Compliance
Part V looks a lot like the previous section with 17 additional Yes or No questions, specific to IRS requirements or filings. These cover issues like foreign bank accounts, tax shelters, quid pro quo donations received, and donor advised funds. There are specific sections of Part V that only apply to certain 501(c) organizations, such as 501(c)(7) and 501(c)(12).
Like Part IV above, certain answers trigger additional disclosures.
Part VI: Governance, Management, and Disclosure
Part VI is the last major section of Yes and No questions, with 20 questions. This part of the return is split into three sections: A, B, and C. Many of these are not required but recommended by the IRS and many tax preparers.
- Section A: asks questions related to the Governing Body and Management.
- Section B: asks questions related to the organization’s Policies.
- Section C: asks about how your nonprofit makes information such as Form 990 publicly visible. This section is all about transparency.
Part VII: Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors
This section is where a nonprofit lists its officers, directors, key employees, and independent contractors. Calendar year salaries or other compensation paid to any of the above listed individuals by the organization or a related organization, as well as any benefits paid must be reported on this part. Part VII is a key area of transparency.
Part VIII: Statement of Revenue
While Part I summarizes the organization’s revenue, Part VIII provides the detail. These detailed line items can then be traced back to the totals summarized in Part I. There are a few types of revenue, such as rental, fundraising, gaming and sales of inventory, that are reported net of directly related expenses.
Part IX: Statement of Functional Expenses
As with Part VIII, this section shows all the detail of expenses that are summarized in Part I. Lines are included for grants paid out, payroll and benefits, taxes paid, fees for professional services, such as legal and accounting, advertising, office expenses, and more. Part IX requires most filers to separate their expenses into three columns:
- Program service expenses
- Management and general expenses, and
- Fundraising expenses
This requires detailed financial recordkeeping throughout the year to assist the Form 990 preparer in the appropriate allocation of all expenses.
Part X: Balance Sheet
Part X details the assets, liabilities and net assets at the beginning and end of the year. This final number rolls up to the Part I summary.
The Balance Sheet is considered a snapshot in time of what the organization has, what it owes, and whether there is any equity after debt is subtracted from assets.
Part XI: Reconciliation of Net Assets
This section calculates the net assets of the nonprofit, including any adjustments to the net assets that are not included in the revenue and expenses on the Form 990, such as net unrealized gains or losses and donated facilities and services. This final number rolls up to Part I.
Part XII: Financial Statements and Reporting
The final section addresses mostly if the nonprofit had a financial statement compilation, review or audit completed in the same year of the 990 preparation.
As you can see from the many parts listed above, the Form 990 is quite involved. In addition to the parts listed above, there are Schedules that also may be required to be included in the Form 990 filing. There are sixteen of these, each with a specific purpose.
To circle back to our question at the beginning of, “Why are you asking me so many questions,” it is clear to see after this overview that there is a significant amount of information required, much of which has to come from the organization. The key to a thorough and accurate filing is the cooperation and exchange of knowledge between the Form 990 and key employees of the organization.
Please contact the Not-for-Profit Niche team at Gilliam Bell Moser LLP for further guidance.
