The IRS Form 990 annually provides comprehensive details on an organization’s financial results and its activities. A key section of the IRS 990 Form is Part VI and the importance of governing body and management disclosures.
What is a governing body?
A governing body is a group of persons that are authorized under state law to make governance decisions on behalf of your organization. For purposes of this article, the governing body will be referred to as “the board” and its members will be called “board members.”
Line 1A of Part VI requires that you enter the number of voting members of the board at the end of the tax year. If there are material differences in voting rights among members of the board or the board has delegated broad authority to an executive or similar committee, these circumstances must be explained in detail in Schedule O. Line 1B of Part VI asks for the number of voting members who are considered to be ‘independent’.
How do you meet the IRS definition of being “independent”?
- The board member is not compensated as an officer or other employee of the filing organization or related organization (though there are religious exceptions to this requirement).
- The board member did not receive total compensation or other payments exceeding $10,000 from the organization or related organization, other than reasonable compensation for services provided as a member of the governing body.
- Neither the board member, nor any family member of the board member, was involved in a transaction required to be reported in Schedule L. (Schedule L reports certain transactions with interested persons, as defined, that includes loans, grants, business transactions, and excess benefit transactions.)
- Neither the board member, or any family member of the board member, was involved in a transaction with a taxable or tax-exempt related organization of the type and amount required to be reported on Schedule L if required to be filed by the related organization.
What is not considered a lack of independence?
- The board member is a donor to the organization (regardless of the dollar amount).
- The board member has a bona fide vow of poverty and either receives compensation as an agent of a religious order or Section 501(d) religious or apostolic organization, but only under circumstances, in which the member does not receive taxable income, or the board member belongs to a religious order that receives sponsorship or payments from the organization that do not constitute taxable income to the member.
- The member receives financial benefits from the organization solely in the capacity of being a member of the charitable or other class served by the organization in the exercise of its exempt function, such as being a member of a Code Sec. 501(c)(6) organization, as long as the financial benefits comply with the organization’s terms of membership.
Reasonable Effort
Organizations are expected to engage in “reasonable effort” to obtain the necessary information to gauge independence. An example of such effort is an annual questionnaire that contains the pertinent IRS definitions and requires formal signing and dating by the member.
Would you like further insights into this concept? Contact bkrisher@md-cpas.com to discuss further.
Look for the next upcoming blog in this Non-Profit Governance Series regarding relationships among governing body members and management.