Most organizations that have been approved for nonprofit status from their state are also able to obtain tax-exempt status from the IRS. Being tax-exempt means that the organization is not required to pay federal taxes or some state and local taxes. Those organizations are also not required to complete a business income tax return at the end of each tax year. However, tax-exempt nonprofit organizations are still required to report to the IRS annually through Form 990.
In this article, we take a close look at Form 990 as well as give some strategies your nonprofit can implement to avoid making common mistakes when completing the return.
What Do The Form 990 Requirements Mean For Nonprofit Organizations?
Form 990 is called the Return of Organization Exempt from Income Tax by the IRS. The informational return is completed each year by nonprofit organizations that have current tax-exempt status in good status. Form 990 is submitted to the IRS through electronic filing or via paper return and is required to be submitted before or on the tax deadline for that year. Most returns can be considered due on April 15th, but the exact date may vary based on the calendar year.
Form 990 includes financial information about the nonprofit, like details surrounding all income and expenses as well as disclosures of assets (what is owned) and liabilities (what is owed). Form 990 also lists the names, contact information, and compensation amounts of key employees and officers. Nonprofit organizations are also required to give descriptions of current programs, fundraising activities, and grants.
It is important to complete Form 990 correctly because the IRS may use the information provided to re-evaluate the exemption status of the entity. Form 990 needs to be consistent with the organization’s previously declared mission and show that the programs and expenses contribute in some sense to the mission.
There are penalties for those organizations who do not submit the return on time, and some nonprofits may even lose their tax-exempt status for failing to comply.
How To Avoid Making These Mistakes On Form 990
Realizing the importance of Form 990, many organizational leaders become overwhelmed with the requirement. There is no need to panic. The return simply requires time, honesty, and consistency. To successfully meet the IRS Form 990 requirements, avoid making common errors like these listed below.
Mistake #1: Not Considering Potential Investors
A critical error made by many new nonprofit organizations is failing to understand the importance of Form 990. The informational return is required by the IRS, but it is also made public. Potential investors, donors, and even grant agencies may review an organization’s return before making contributions.
Any interested party can review a Form 990 by visiting the IRS website or checking out sites dedicated to providing nonprofit information, like Charitynavigator.com. Many nonprofit organizations also choose to proactively publish a copy of their Form 990 on their website.
Solution: Sell your organization’s purpose
Be sure to include all relevant information about your organization’s programs and continued work towards fulfilling the original purpose of the nonprofit.
Mistake #2: Only Reporting Unrestricted Income
Nonprofit organizations often misunderstand the requirements of Form 990 when it comes to declaring income. Accountants and bookkeepers that manage the finances of nonprofits typically use fund accounting, which differentiates income as either “restricted” or “unrestricted.”
This is necessary for nonprofits that receive funding from agencies or individuals where the use of those funds is predetermined. A practical example may include a grant that is earmarked for a specific project or program.
Solution #2: Report all revenue and income
Revenues and income are disclosed in detail in Part VIII of Form 990, and totals are taken from that section to be reported in the “revenue” summary portion in Part I.
Mistake #3: Improperly Identifying Officers And Key Employees
Form 990 requires nonprofits to disclose the details about governing individuals in the summary section of Part I and Part V. There is also a section of Form 990, Part VII, that requires the organization to list the names and compensation amounts of:
- Key Employees
- Highest Compensated Employees
- Independent Contractors
Solution #3: Be prepared with formal job descriptions
Before filling out the first Form 990, be sure that details about the individuals influencing the governance of the organization are outlined in the board policies. Each person listed on Form 990 must be designated only one of the following titles unless they are both an officer and a trustee or director.
- Highest compensated employee
- Key employee
- Institutional trustee
- Individual trustee or director
Mistake #4: Missing Schedules
Nonprofit organizations often complete their Form 990 with accuracy, only to realize they’ve forgotten to attach a required schedule. The schedules of Form 990 are not much different than some schedules completed with income tax returns. The IRS will not consider the organization’s filing obligation as complete if there are missing or inaccurate schedules.
Solution #4: Attach completed schedules as required
Part IV of Form 990 is titled, “Checklist of Required Schedules.” Complete this section thoroughly to create an accurate list of all required schedules. Some common schedules required for nonprofits are:
Schedule A – Public Support and Public Charity Classification
Schedule C – Political Campaign and Lobbying Activities
Schedule D – Supplemental Financial Statements
Whether you choose to e-file Form 990 or submit a paper return, it is critical to complete an accurate return every year the organization exists. The most cost-effective way for most nonprofit organizations to complete Form 990 and minimize potential risks of errors is to consult with an accounting service, like JFW Accounting Services, that has expert-level knowledge of how nonprofits work and up-to-date IRS regulations.
Jo-Anne Williams Barnes, is a Certified Public Accountant (CPA) and Chartered Global Management Accountant (CGMA) holding a Master’s of Science in Accounting (MSA) and a Master’s in Business Administration (MBA). Additionally, she holds a Bachelor of Science (BS) in Accounting from the University of Baltimore and is a seasoned accounting professional with several years of experience in the field of managing financial records for non-profits, small, medium, and large businesses. Jo-Anne is a certified Sage Intacct Accounting and Implementation Specialist, a certified QuickBooks ProAdvisor, an AICPA Not-for-Profit Certificate II holder, and Standard for Excellence Licensed Consultant. Additionally, Jo-Anne is a member of American Institute of Certified Public Accountant (AICPA), Maryland Association of Certified Public Accountants (MACPA), and Greater Washington Society of Certified Public Accountants (GWSCPA) where she continues to keep abreast on the latest industry trends and changes.