IRS Form 990 is the most critical annual compliance filing for nonprofits. It’s like a window into your nonprofit, which makes it a challenging tax (information) return to complete. In this guide, we’ll take a look at five best practices to make your next filing easier:
- Keep Track of Your Finances for Form 990
- Record Donor Information to Include in Your Form 990
- Track Your Activities and Accomplishments
- Get a Head Start on Form 990 Preparation!
- Hire a Nonprofit Tax Professional to File Form 990 For You
There are ways to prepare in advance to make sure that the actual task of completing and filing Form 990 isn’t quite so painful. Here are our top 5 best practices, in no particular order.
Form 990 is an examination of your income, expenses, and activities. So it only makes sense that the best way to prepare for the form is by keeping track of your nonprofit’s financial records.
So how exactly can you keep track? There are several ways:
- Use a real bookkeeping or accounting app. Don’t rely solely on written records to track financial activity. Quickbooks Online and Aplos are two, fantastic web-based accounting apps that are affordable, and can help you keep accurate records of income and expenses. Plus, they’ll provide you with periodic financial reports. While desktop accounting software is perfectly fine, online apps allow you to log on from anywhere with an internet connection. Mobile accounting also makes it much easier to provide your bookkeeper, accountant, or tax preparer access.
- Keep your records current. For these tools to make a difference, you actually have to use them properly and regularly. Stay on top of your records to avoid having to reconcile your books before starting your Form 990. That way, you can focus solely on the form instead of worrying about your records, too.
- Make sure your books reflect accounting standards for nonprofits. This is a tough one, particularly for those keeping their own books. You’ll need to properly account for circumstantial situations, such as restricted gifts, and you could risk messing something up if you don’t know what you’re doing. Hire a professional bookkeeper who knows how to do it right.
Failing to track your finances is not only irresponsible, but it’s also a violation of state and federal regulations that require tax-exempt organizations to maintain accurate books. Start keeping records now to maintain compliance and avoid financial issues down the line.
It’s important to track information about your donors and their donations and keep this data indefinitely. Donor data tracking is just as important to your Form 990 as orderly financial records for two reasons:
- They’re related. Your donors’ contributions make up your organization’s income.
- The IRS requires donor data. You’ll need this information readily available to provide a list of your biggest contributors to the IRS. Plus, this data is necessary to calculate your annual public support percentage.
Track donations in an online app designed for nonprofits with your organization’s structure and needs. Smaller organizations with fewer donors might be able to record donations in an Excel spreadsheet, or something similar. However, there are a variety of software platforms for any organization size to help you organize this information.
As you prepare to file, you might understand the basics of Form 990 to include financial records and donor history. But relatively few organizations think to record activities and accomplishments as the year rolls along.
Form 990 requires filers to list their individual charitable programs by name or purpose, then describe in detail what was accomplished during the year. For example, you may need to include things like:
- A description of the program.
- The number of people served.
- Income and expenses allocated to the activity.
- Whether it was a new program or the continuation of an existing one.
Instead of scrambling to put this information together when it’s time to file your Form 990, keep track of it as it happens. This makes filing easier for your nonprofit and ensures you report detailed and accurate information.
There’s a reason our Compliance Team works 16-hour days during select weeks in May and November. Clients sometimes underestimate what’s required in their Form 990, forcing them to scramble at the last minute to submit their information. Every tax firm deals with this reality.
Filing a late Form 990 subjects your nonprofit to a penalty of $20 per day, plus compounded interest, every day that your return is late. These penalty assessments commonly reach thousands of dollars worth of fines. And, if your nonprofit brings in over $1 million per year, the penalty is $100 per day!
Starting your Form 990 preparation early will benefit your nonprofit in the long run, not only by avoiding late fees but also by staying on top of compliance requirements.
As the old saying goes, “You don’t know what you don’t know.” These are very true words when it comes to Form 990 preparation.
Form 990 is a complex tax return, requiring in-depth knowledge of nonprofit tax law and compliance, plus accounting standards for nonprofits. Very few charitable organizations have someone on the inside with the requisite experience necessary to prepare an accurate return.
Chances are, you wouldn’t attempt to work on your modern, computer-controlled car if you’re not a certified mechanic. The same logic applies here. Trust a professional to prepare Form 990 for your nonprofit.
Among the numerous requirements of nonprofit compliance, Form 990 is a crucial and complex filing. Making a comprehensive list of all the information you’ll need to file and organizing this data throughout the year is a necessity.
However, if you would rather focus your resources on fundraising, marketing, and furthering your nonprofit’s mission, do that! Nonprofit tax professionals exist to take care of your organization’s tax filings and compliance requirements. No matter how you approach Form 990, make sure you have a structured plan and well-kept data to file it efficiently.