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Form 990 Sections Explained

Form 990 Sections Explained

One of the questions we often hear from clients, especially regarding Form 990 preparation, is, “Why are you asking me so many questions?”  This is sometimes followed by a comment like, “If I knew I had to answer this much stuff, I might have done this myself!”

Form 990 Is Complex

The hypothetical question is fair one.  Why do we ask our clients for so much information before we prepare a Form 990 for them?

The answer is that Form 990 is a complex tax return.  In fact, Form 990 requires more information than most of the more complicated corporate returns you can file.  So why is that?

We believe it is mostly due to the filing organization being exempt from federal income tax.  As such, there is high threshold of accountability to ensure that the nonprofit is truly operating in a tax-exempt manner.  The only way to see that is to ask lots and lots of questions and to require a lot of disclosure, both numerically and operationally.

In this post, I’m going to break down the major sections of Form 990 and talk about the information that must go in there.  I won’t go into the sub-schedules here.  We’ll save that for another post.

Form 990 Sections
Header

There’s a surprising amount of information required in Form 990’s header on page 1.  This includes:

  • The tax year beginning and ending, assuming it’s not January through December
  • Check boxes in case of name change, address change, whether it’s an initial return, an amended return, or a final return.  There’s even a checkbox for a nonprofit whose 501(c)(3) status is pending
  • Name and address of the organization
  • Employer ID number
  • Telephone number
  • Amount of gross revenue from all sources
  • Name and address of the principal officer
  • The 501(c) code section of tax exemption the nonprofit was approved for
  • Whether or not this return involves a group exemption
  • The website address of the organization
  • Year of formation, and
  • The state of incorporation!

And that’s just the first six inches of the first page!  As I said, they want to know a lot.

Part I: Summary

I won’t go into as much detail for each section as I did for the header.  My point was to help you understand just how much information the IRS seeks from tax-exempt organizations each year.

Part I, Summary, does what it sounds like:  summarizes content from other sections of the return for easy glance.  In fact, a quick scan of the first page of a nonprofit’s Form 990 can tell you a lot.

  • Under Activities & Governance, there’s information about the mission, activities, and the number of board members, employees, and volunteers, plus how much income can come from unrelated business income.
  • The Revenue section of Part I summarizes income from donations, programs, investments, and other sources.  This section also asks for those numbers from the prior tax year.
  • The Expenses section summarizes expenses by major line item, such as grants paid, compensation and benefits paid, fundraising fees, and “Other Expenses”…the ultimate roll-up category.  Prior tax year data is included here, too.
  • Finally, Part I ends with Net Assets or Fund Balances, where you should see the difference between income and expenses totaled for a net asset valuation.

Part II: Signature Block

Maybe the least complicated section of this return is the Signature Block.  Here are lines for the signature of a principal officer, as well as space to list the professional preparer’s information.  If we are preparing a client’s Form 990, our info goes here.

These days, the signatures aren’t your traditional wet ink variety.  The IRS requires all Form 990 filings to be electronic now, so this section is now devoid of handwriting in almost all situations.

Part III: Statement of Program Service Accomplishments

Part III takes up the entirety of Page 2 of Form 990.  This section provides space for a nonprofit to give details about what the organization accomplished programmatically the prior year.

  • There’s a place to give an expanded version of the nonprofit’s mission.
  • Questions are asked about 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 of these.
  • Sub-schedule O is where additional program accomplishments can be detailed, then summarized here in Part III.

Part IV: Checklist of Required Schedules

Part IV spans all of page 3 and nearly all of page 4.  This section is comprised of 38 separate Yes/No questions…some with sub-questions…covering a wide variety of topics, including governance, lobbying, and conservation easements.  Then there are the questions about whether the accounting records were audited, questions about foreign activities, and fundraising.  Did your nonprofit operate a hospital?

It’s a lot.  But that’s not all!

Depending upon the answer to a particular question, there’s a good chance that answer will result in the need to explain that answer in detail on another sub-schedule.  A simple checkbox marked “Yes” could mean 3 more pages of detail are required.

Part V: Statements Regarding Other IRS Filings and Tax Compliance

Part V looks a lot like the previous section with 17 more Yes/No questions, many with sub-questions.  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 much more information required.

Part VI: Governance, Management, and Disclosure

Part VI is our last major section of Yes/No questions, this time with 20 questions with sub-questions. This part of the return is split into three sections:  A, B, and C.

Section A covers the Governing Body and Management.  Fortunately, most answers here will not trigger a sub-schedule.

Unfortunately, however, some answers may trigger an audit!  Section A, Question 5 has always stuck out to us as a loaded question.  It asks, “Did the organization become aware during the year of a significant diversion of the organization’s assets?”

A yes answer here indicates something like embezzlement or some other type of theft has occurred.  We’ve seen more than one nonprofit audited as the result of an inadvertent “yes” answer here!

Section B is about Policies…which ones do you have in place and which ones do you not?  And if you do, how to do you ensure your people know and abide by those 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

Are you noticing a theme of thoroughness yet?

Part VII is where a nonprofit lists its officers, directors, key employees, and independent contractors.  Included in this section is the title of each individual, how much (if any) each of these people are paid, whether on W2 or 1099-NEC, and how many hours they work per week, on average.

This section is a key area of transparency.  Since Form 990 is made publicly available on the IRS website for anyone to review, it’s always important to remember that the public can see what your key people are paid.  Now, that’s not true of every employee.  But it is true for those in leadership and those not in leadership if their pay is more than $150,000, including benefits.

Part VIII: Statement of Revenue

I mentioned earlier that Part I summarizes the organization’s income.  Part VIII is the fine detail of that.

Here, revenue from all sources is detailed.  Like Part I, it is divided into sections:

  • Contributions, Gifts, Grants, and Other Similar Amounts
  • Program Service Revenue – This is revenue from sales of goods or services, directly related to mission
  • Other Revenue – A catch-all with lines for investment income, rental income, fundraising income from events, gaming, and more.
  • Miscellaneous Revenue – If it wasn’t captured above, it will be listed here.

These detailed line items give the totals that are summarized in Part I.

Part IX: Statement of Functional Expenses

Part IX provides the detailed line items of expenses that will roll up to Part I, as well.  Lines are included for grants paid out, payroll and benefits, taxes paid, fees for professionals services, such as legal and accounting, advertising, office expenses, and more.

What’s interesting about Part IX is that is doesn’t just ask for the totals for each category.  Part IX is laid out like a spreadsheet with the line items being the rows, with three columns for each expense:

  • Program services expenses
  • Management and general expenses, and
  • Fundraising expenses

For example, under the Salaries and Wages line item, a nonprofit may have payroll that was allocated to employees exclusively involved with the nonprofit’s programs.  Some payroll may be allocated to administrative-only staff, or fundraising employees.  Or maybe, some of one employee’s payroll is allocated between all three!

This is a complex section that requires detailed financial recordkeeping during the year.  If your books are not tracking expenses by allocation, Form 990 preparation becomes much more difficult for your preparer.

Click this graphic to contact Foundation Group to learn more about bookkeeping for churches.

Part X: Balance Sheet

Part X is the Balance Sheet for the year-end of the reporting year.  For those not familiar with the primary accounting financial statements, the Balance Sheet shows how much the organization has in asset valuation, how much debt there is, and the difference is the net asset balance.  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.  It is a very telling indicator of the financial health of any nonprofit.

Part XI: Reconciliation of Net Assets

Part XI calculates the net equity, or net assets, of the nonprofit.  It takes the asset and liability totals from Part X and nets them together for the resulting amount of net assets.  This final number rolls up to Part I.

Part XII: Financial Statements and Reporting

Our final section is another Yes/No question list that pries into the details of the nonprofit’s accounting procedures.

  • What accounting method was used:  Cash or accrual?
  • Were the books reviewed by an independent third party?
  • Was there an audit conducted by a CPA firm?
  • Was there a federal grant that required an audit?

Some answers here may trigger additional details required in sub-schedules.

Conclusion

To say that Form 990 is complicated is a lot like saying the ocean is deep.  The word “complicated” doesn’t do it justice.  And mind you…I didn’t cover sub-schedules A through O yet.

What we covered in this article are the 12 pages of the core return.  We’ve seen final Form 990 filings that are in excess of 50 pages!

So, why do we ask our clients for so much information prior to completing Form 990?  Because so much information is required, and we can’t possibly know these answers without asking.  Knowing how to interpret the information our clients provide, however, is key to a thorough and accurate filing.

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Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

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