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Reviewing a Form 990 as a Board Member

Health Care|Higher Education|Not-for-Profit|Tax

By Melanie Pantalone

Beginning in 2008, the Internal Revenue Service requires disclosure of 1.) whether an organization’s Form 990 itself has been provided to the filing organization’s full governing body prior to being filed, and 2.) any process of review of the Form 990 undertaken by the governing body.  Information related to these disclosure requirements can be found in the Form 990, Part VI, Section B, Policies, questions 11a and 11b. 

The purpose of this article is to point out some key areas of the Form 990 that board members should cautiously review, prior to filing. 

The Form 990 is one of the most public facing documents of an exempt organization

As a new board member to a non-profit or even a well versed, experienced board member, understanding the importance of a Form 990 and the reputational risk is imperative.  The Form 990 is one of the most public facing documents of an exempt organization.  The return is open to public disclosure with the exception of Schedule B, Schedule of Contributors.  The users of a Form 990 (donors, debt holders, competitors, local community members, potential employees and board members, etc.) can gain an understanding of the organization’s financial picture, how the board governs the organization, policies adopted by the organization, programs the organization offers, if the organization receives an audit or review, if the organization incurs lobbying expenses, if the organization grants out funds, compensation of the top employees, if there are any related organizations, etc. 

Tying the financial statement numbers to the Form 990.

Reviewing the financial statements and tying the numbers to the Form 990 should be a step completed by the organization’s management and reviewed by board members.  Reporting the financial numbers accurately on the correct schedules is crucial.  Form 990, Schedule D, Part XI and XII, provide a reconciliation of the audited financial statements to the tax return.

Public support calculation.

One of the most important pages of the Form 990 is the public support calculation located in Schedule A.  A public charity must maintain 33 1/3% support from the public in order to maintain an exempt status.  Whether your organization is a 509(a)(1) (contribution based) organization or a 509(a)(2) (programmatic based) organization, understanding the calculation and assuring that the organization stays above the 33 1/3% is very important.  If an exempt organization falls below the percentage, the organization is in jeopardy of losing their exempt status.

Compensation of employees.

Compensation of employees reported on the Form 990 is often viewed by users of the form.  Part VII, the officers, key employees and board members compensation on the functional expense schedule and Schedule J are all highly scrutinized by the public for some exempt organizations.  Reviewing of the Schedule O disclosure on the determination of compensation for the employees reported should be completed.

Track revenue and expenses based on program activities.

Form 990, Part III, Statement of Program Service Accomplishments is area where watchdog organizations, like charity navigator, are focusing.  Organizations should be very descriptive in this section of the return.  On lines 4a-4c, an organization lists its top three programs in order of amount of expenses.  An organization should be very specific about programs and give statistical information on accomplishments.  Organizations need to track revenue and expenses based on program activities.

Unrelated business income (UBI).

Last but not least, board members should gain a thorough understanding of unrelated business income (UBI) and the three criteria that a stream of revenue must meet to be considered UBI:

  1. Is the activity a trade or business;
  2. Is the activity regularly carried on;
  3. And is the activity not related the organizations exempt purpose.

If an organization answers all three of these questions yes for a certain activity, they could potentially have unrelated business income and a Form 990-T, Exempt Organization Business Income Tax Return, would need filed.  A board member could start this process by asking questions of the organization and understanding all the revenue sources throughout the organization.

The ultimate responsibility lies with the board members. 

The Form 990 is a detailed, informative return that contains many questions about the organization.  The ultimate responsibility as to what gets reported to the IRS and the public lies with the board members.  Board members should take time and read through the Form 990 and assure that the organization is accurately reflected throughout the return. 

For more information or questions regarding the review of the Form 990, please Contact Schneider Downs.

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The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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