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New Form 990 Instructions Released For Tax-Exempt Organizations

On August 19 2008, the IRS issued instructions for the redesigned Form 990, "Return of Organization Exempt From Income Tax," which it released in December 2007. Because the complex new form is designed to enhance transparency and promote tax compliance, filing it is expected to require greater public disclosure and more preparation time.

Exempt organizations are generally required to use the new Form 990 for fiscal years that end on or after December 31, 2008. Smaller organizations will be allowed to phase in using the new form over a one- to three-year period, depending on annual gross receipts and total assets.

Not-for-profits that weren't required to file Form 990 before the new instructions were issued, such as churches and certain church-related organizations, remain exempt from the filing requirement.

The new Form 990 instructions confirm that a not-for-profit must potentially provide information on as many as 20 policies that it might have in place (some apply to only a small number of organizations), or disclose to the IRS—and thus ultimately the public—that it has no policies in these areas. Because of the new form's complexity and significance, not-for-profits should begin gathering the information they need now, if they haven't started to already.

Key steps

The Blackman Kallick Not-for-Profit Tax Group hosted a round table for our clients to present these Form 990 changes and to provide assistance on what steps an organization can take now to help prepare for filing this new form. If you were not able to attend, you can download our Form 990 Round Table Handouts here.

If you're a not-for-profit executive or board member, the following are some steps your organization can take now to make sure your organization is ready to file the new 2008 Form 990:

• Review the Blackman Kallick Form 990 Questions Grid to determine the following:
  • Supplementary schedules your organization might be required to complete
  • Policies and procedures your organization should implement
  • Other items listed in the "Things to Do Now" column that you can start implementing for each applicable schedule.
• Contact your Blackman Kallick tax representative to discuss any questions or concerns that you might have.
• Visit the IRS Web site at http://www.irs.gov/charities/index.html if you would like more information on the revised form or to view copies of the draft Form 990 and instructions.
• Stay tuned for additional Blackman Kallick articles on the new Form 990, which will focus individually on various sections or schedules of the new form and will help your organization gain a better understanding of the reporting requirements in a more manageable format.

Revised format

The new Form 990 uses a "core form" that all filing organizations must complete. Important new elements—those emphasized by the IRS—include the following:

• Summaries of your organization's purpose, your board's independence, your organization's staffing and two years of financial information including major income and expense categories, assets and liabilities
• Substantial new governance and policy information (see listing below)
• Greater opportunity to describe programs while disclosing revenue, program by program

Significant new details that might not be readily available without proper planning include information on the following:

• Specialized assets, including donor-advised funds; conservation easements; tax, escrow and custodial accounts; endowment funds; and investments in land, buildings and equipment
• Fundraising and gaming activities and events including amounts paid to professional fundraisers and details about bingo and other games
• For hospitals, information on charity care and community benefits provided—only a detailed list of "facilities" (a term specifically defined by the final instructions) is required for 2008, but the IRS will expect extensive details moving forward
• Grants and other assistance provided by the organization to other organizations, governments and individuals in the United States—this includes scholarships, awards, traditional grants, and relief and charitable support for individuals
• Tax-exempt bond information—limited reporting for 2008, but the IRS will expect extensive details in later years
• Activities outside the United States, including expenditures—country-specific information isn't required for 2008, but will be required for future years.

Some previously required information simply moves to the new schedules.

Compensation and insider transactions

The new Form 990 emphasizes compensation issues and insider transactions, and might require additional information from past years including the following:

• Payments to all current and former board members, officers, key employees and highest-paid employees
• Supplemental compensation information for many executives paid more than $150,000 and all former executives and board members regardless of amount—details will include base compensation, bonus/incentives, other current compensation, deferred compensation and nontaxable benefits, whether paid by the organization or a related organization
• Payments to and from related organizations
• Identification of, and policies on, executive travel
• Identification and descriptions of excess benefit transactions, loans and buying, selling and other business/financial exchanges with insiders

Governance and policies

Governance issues are emphasized by the IRS as are certain organizational policies common to many not-for-profit organizations including the following:

• Your board's independence, voting rights and elections
• Your board's review of Form 990 prior to filing
• Any conflicts of interest and your compliance-monitoring process
• Your audit committee
• Executive compensation including travel, housing, clubs and discretionary accounts
• Whistleblower protection
• Document retention
• Affiliate chapters
• Joint ventures
• Public availability of exemption application and Forms 990 and 990T
• Gift acceptance
• Conservation easements
• Grant funds paid in the United States
• Grant funds paid in foreign countries
• Tax-exempt bond policies
• For hospitals—charity care, community benefit and debt-collection policies
• For schools—racial nondiscrimination

Smaller organization phase-in

The new Form 990 is being phased in for smaller organizations, which may file the simpler Form 990-EZ during a transition period as follows:

• 2008—organizations with gross receipts under $1 million and assets under $2.5 million
• 2009—organizations with gross receipts under $500,000 and assets under $1.25 million
• 2010 and after—organizations with gross receipts under $200,000 and assets under $500,000

Caution: Even if your organization is eligible to file Form 990-EZ, be aware that the new version incorporates some of the new requirements from the new (regular) Form 990 and the applicable supplementary schedules such as Schedule A – Public Charity Status and Public Support; Schedule B – Schedule of Contributors; Schedule C – Political Campaign and Lobbying Activities; Schedule E – Schools; Schedule G – Fundraising and Gaming Activities; Schedule L – Transactions with Interested Persons; and Schedule N – Liquidation, Terminations or Dissolutions.

An opportunity for improvement

This article highlights only the new requirements likely to affect most tax-exempt organizations. Check with your Blackman Kallick representative to see whether your particular not-for-profit must meet additional new Form 990 requirements.

While gathering and reporting the additional information required by the new form can be a chore, it also has an upside. Preparing the new Form 990 provides an opportunity to:

• Upgrade your practices and reporting. The form's questions about policies and practices might result in your organization adopting useful new policies or improving existing ones. It might also be an opportune time to step up weak or questionable reporting.
• Provide more useful information to the public in a format that positively showcases your organization. Grantors and donors are likely to begin using Form 990 data to make funding decisions. The more you can show that your organization is efficiently and effectively run, the easier your fundraising will be.

Whether your organization benefits from the changes depends largely on your readiness. According to the IRS, "minor changes in format and wording" to the new form might follow, but no major changes are expected.

So don't wait until filing time to start preparing for the new Form 990. Call us now or visit our Not-for-Profit Practice on our Web site to learn what your organization can do before the end of the fiscal year to present itself in the best public light. The sooner you act, the more you can make the new requirement a plus rather than a minus for your not-for-profit.

If you have any questions or would like a copy of the materials from our Form 990 round-table presentation, please call Lu Ann Trapp, Tax Manager, at 312-980-3281 or Kim Haumann, Tax Manager, at 312-980-3249. 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.