IRS Regulations
May 23, 2018


Overview

Tax-exempt organizations, nonexempt charitable trusts, and section 527 political organizations are required to file an IRS Form 990. Did you know that the IRS 990 series consists of six different forms, and that the filing requirements of tax-exempt organizations vary depending on the type of organization and the amount of annual gross receipts and year-end assets held? Therefore, it is important that your non-profit have a detailed understanding of the correct form in the 990 series it is required to file. All 990’s are required to be filed by the 15th day of the 5th month following year end (June 30th year ends are due November 15th and December 31st year ends are due May 15th). All 990 filings (except 990-N) can be extended by filing IRS Form 8868. While there is no penalty assessment for filing Form 990-N late, organizations that fail to file required Forms 990, 990-EZ or 990-N for three consecutive years will automatically lose their tax-exempt status.In addition, form 990, 990-EZ and 990-PF are all public documents available on Guidestar.

990-N

An organization with gross receipts of $50,000 or less typically files an IRS 990-N. The 990-N filing is submitted electronically and is known as the ‘E-Postcard’ filing. Note that even if an entity meets the $50,000 receipt threshold the following organizations are not eligible to file Form 990-N:

  • Organizations that are included in a group return,
  • Churches, their integrated auxiliaries, and conventions or associations of churches (not required to file at all)
  • Organizations required to file a different return
    -Private Foundations must file 990PF regardless of size
    -Supporting organizations (section 509(a)(3) supporting organizations must file 990 or 990EZ)
    -Section 527 political organizations
  • Other organization types that are ineligible to submit a Form 990-N include:
    -Section 501(c)(1) – U.S. government instrumentalities
    -Section 501(c)(20) – Group legal services plans
    -Section 501(c)(23) – Pre-1880 armed forces organizations
    -Section 501(c)(24) –ERISA Section 4049 trusts
    -Section 501(d) – Religious and apostolic organizations
    -Section 529 – Qualified tuition programs
    -Section 4947(a)(2) – Split-interest trusts
    -Section 4947(a)(1) – Charitable trusts treated as private foundations

Completing the e-Postcard requires the eight items listed below:

  • Employer Identification Number (EIN) also known as a Taxpayer Identification Number.
  • Tax year
  • Legal name and mailing address
  • Any other names the organization uses
  • Name and address of a principal officer
  • Web site address if the organization has one
  • Confirmation that the organization’s annual gross receipts are $50,000 or less
  • If applicable, a statement that the organization has terminated or is terminating (going out of business)

990-EZ

An organization with gross receipts of less than $200,000 and total assets of less than $500,000 typically files a 990-EZ. The following types of organizations are exceptions to this:

  • Private foundations
  • Group returns
  • Sponsoring organizations of donor advised funds (as defined in section 4966(d)(1))
  • Organizations that operate a hospital facility
  • Organizations recognized by the IRS as section 501(c)(29) nonprofit health insurance issuers
  • Certain controlling organizations defined in section 512(b)(13)

The IRS encourages the electronic filing of 990-EZ over paper filings. In 2016, the error rate for electronically filed 990-EZ returns was only 1%, as compared to a 33% error rate in paper-filed returns. In 2016, the IRS processed over 263,000 Forms 990-EZ, with the majority of the filings – 139,000 being completed on paper. Effective January 2017, the updated Form 990-EZ includes 29 “help” icons describing key information needed to complete many of the fields within the form. The icons also provide links to additional helpful information available on IRS.gov. These “pop-up” boxes share information to help small and mid-size exempt organizations avoid common mistakes when filling out the form and filing their return.

990

Non-profits with gross receipts of $200,000 or more and total assets of $500,000 or more are required to file the 990. The current 990 form has remained greatly unchanged since a major overhaul of the form was completed for the 2008 tax year. Updates are expected to be required to conform the 990 to the revised not-for-profit reporting model issued by the FASB Accounting Standards Update 2016-14.

The core 990 form consists of 11 pages including a summary on page 1, as well as detailed information on program activities, a checklist of schedules required, policies, board of directors, and financial information. The core form must be completed in its entirety as well as one or more of 16 schedules

990 Schedules

Listed below are the various schedules required in the 990 Form:

  • A Public Charity Status and Public Support
  • B Schedule of Contributors. Note that the Schedule B is the only schedule that is not required to be publicly available and not included on Guidestar.
  • C Political Campaign and Lobbying Activities
  • D Supplemental Financial Statements (Additional information on fixed assets, endowments, assets held in custody/trust, other asset/ liability detail; reconciliation to audited financial statements)
  • E Schools
  • F Statement of Activities Outside the United States
  • G Supplemental Information Regarding Fundraising or Gaming Activities (fundraising activities greater than $5,000; also, information on professional fundraisers and gaming activities)
  • H Hospitals
  • I Grants and Other Assistance to Organizations, Governments and Individuals in the U.S.
  • J Compensation Information (Compensation to officers, directors, key employees, and highly compensated employees of paid salary and benefits greater than $150,000
  • K Supplemental Information on Tax Exempt Bonds
  • L Transactions with Interested Persons (Schedule L is also used to determine whether a member of the organization’s governing body is an independent member; can do business with the organization and still be independent, as there are thresholds in schedule L that must be met for required disclosure.)
  • M Noncash Contributions (includes stock donations)
  • N Liquidation, Termination, Dissolution or Significant Disposition of Assets (to provide information relating to going out of existence or disposing of more than 25% of a non-profit’s net assets through a contraction, sale, exchange, or other disposition)
  • O Supplemental Information to Form 990 (an organization can put any additional information it wants readers to know and add responses to various questions noted throughout the core form)
  • R Related Organizations and Unrelated Partnerships (to provide information on related organizations, certain transactions with related organizations, and certain unrelated partnerships through which they conduct significant activities)

990-PF

Non-profits that are private foundations, of any size, are required to file a 990-PF. There are no EZ or N filing versions for a private foundation; therefore, regardless of revenue size, foundations must file a 990-PF annually. The primary differences between a public charity and private foundation are:

  • Exempt purpose (while both are 501(c)(3) organizations, public charities perform direct charitable work; whereas, the primary purpose of foundations is to support public charities.)
  • Net investment is subject to excise tax (Private foundations are subject to either a 1% or 2% excise tax on net investment income, which depends on a calculation of the current year qualifying distributions compared to a five-year average of the adjusted qualifying distributions to the net value of noncharitable use assets. This calculation is included as part of the 990-PF.
  • Required minimum qualifying distributions (Generally speaking, private foundations are required to distribute 5% of their fair value of assets annually).This computation is also completed as part of the 990–PF.
  • Specific rules on private benefit, lobbying, self-dealing, taxable expenditures, and excess business holdings.

990-T

Organizations with Unrelated Business Income (UBI) are required to file an IRS 990-T. To meet the definition of UBI, all 3 characteristics below must be met:

  • Considered to be a trade or business, and
  • Regularly carried on, and
  • Not substantially related to the non-profit’s exempt purpose

The term trade or business generally includes any activity carried on for the production of income from selling goods or performing services. Also, is the primary objective from the activity to generate a profit? Business activities of an exempt organization ordinarily are considered regularly carried on if they show a frequency and continuity. This could be a seasonal activity that occurs every year once per year. The activity does not need to be ongoing to meet the regularly carried on definition. To determine if a business activity is substantially related requires examining the relationship between the activity and the organization’s mission. Activities are not related to a non-profits mission just because they earn profit that is spent on mission related activities. What matters is the activity itself, not how the income will be spent from the activity.

Common exclusions to UBI are as follows:

  • Dividends, interest, and certain other investment income (Many alternative or foreign holdings issue K-1’s that do include unrelated business income (under Box 20, code V) that is required to be reported on the 990–T even for non-profit organizations).
  • Unrelated debt financed income (Typically this occurs when a building is purchased but also would apply to investments purchased with borrowed funds. Debt financing could include debt on the asset at any point in the year either before, during, or after the purchase (or improvement) of the asset. An exception to the exception is that if the debt financed property is generally 85% or more utilized in furtherance of the exempt purpose of the organization. None of the activity is taxable under the debt-financed rules.)
  • Volunteer labor (Any trade or business is excluded in which substantially all the work is performed by individuals not receiving compensation. Some fundraising activities may meet this exception.)
  • Convenience of members (Any trade or business is excluded that is carried on by an organization described in section 501(c)(3) primarily for the convenience of its members, students, patients, officers, or employees.A common example of this is a hospital cafeteria.)
  • Selling donated merchandise (Any business is excluded that consists of selling merchandise, substantially all of which the organization received as gifts or contributions.Many thrift shop operations of exempt organizations would meet this exception.)
  • Bingo (Certain bingo games are not unrelated trade or business. To qualify for this statutory bingo exclusion, a game must meet the definition of bingo under the Internal Revenue Code and Treasury Regulations, not violate state or local law where it is played; and be played in a jurisdiction where bingo games are not regularly carried on by for-profit organizations.)

If your organization has UBI:

  • Income can be offset by expenses directly connected to generating the income (The non-profit should make sure it can substantiate expenses – timesheets, cost allocations, separate general ledger accounts, etc.)
  • Specific deduction (generally $1,000) (The specific deduction will be the smaller of $1,000 or the gross income from any unrelated activity.)
  • Carry forward/back net operating losses (An organization can carry forward Net Operating Losses [NOL] : Under Code section 172(b), an organization generally may carry NOL back up to 2 tax years or forward up to 20 tax years. An organization that wishes to carry NOL back to a prior year must file an amended Form 990-T for that year.)
  • Forms are subject to public inspection.
  • Must be filed in paper format.
  • Non-profits are taxed (except trusts) at corporate.
  • Tax must be paid electronically.

The preceding article is an abstract from a seminar conducted by Michelle L. Bryan, CPA, Principal, from the 2017 Maher Duessel Government Update seminar. Please contact the presenter for additional information.