Cracking the Code of Form 990: Building Trust and Transparency in Your Nonprofit | Article

Helping nonprofits decipher the enigma that is Form 990. We’ve seen firsthand the furrowed brows and the raised eyebrows that often come with tackling this beast of a tax document. This article is born out of those experiences and is designed to aid in understanding the purpose of this nonprofit tax form. We hope this clears some of the confusion and answers many of the “whys” and makes Form 990 a more manageable task, while helping you safeguard your organization's tax-exempt status and bolster its financial transparency.

Preparation of Form 990 is more than just a compliance activity

Ultimately the 990 form is an opportunity for your nonprofit to demonstrate its commitment to transparency, ethical conduct, and effective use of resources. The Form 990 offers an extensive picture of a nonprofit organization's financial health, operational efficacy, and integrity. For many donors, a review of an organization's 990 is a critical factor in their decision to offer their continued financial support. Given its complexity, it may be beneficial to partner with a financial services company to ensure accuracy and thoroughness in your 990 preparation.

Who Should File Form 990?

All tax-exempt organizations, nonexempt charitable trusts, and section 527 political organizations must file a Form 990 or 990-EZ each year, except for religious institutions and certain state institutions. Smaller nonprofits with gross receipts of less than $50,000 can file Form 990-N, also known as the e-Postcard.

Gathering Necessary Information

Form 990 requires a range of details about your organization's finances and activities during the tax year. Information includes income, expenses, assets, liabilities, programming activities, changes in net assets or fund balances, and transactions with interested persons.

Choosing the Correct Form

Depending on the size and nature of your organization, you may need to file one of several versions of Form 990: the aforementioned 990-N for smaller nonprofits, 990-EZ for mid-sized organizations with gross receipts less than $200,000 and total assets less than $500,000, and the standard 990 for larger nonprofits. Organizations with 100% of their support from government sources or the public, and having total support greater than $5,000,000, must file Form 990.

Completing the Form

The form begins with a summary of the organization and its mission, significant activities, and governance structure. It continues with financial details, divided into categories like revenue, expenses, assets, and liabilities. The form also includes sections for disclosing conflicts of interest, compensation of officers, other IRS filings, and more.
Starting with the organization's summary, this section captures the essential data about your organization. It provides an overview of your organization's mission statement, which is a brief description of the purpose of the organization. This is crucial as it sets the stage for how the rest of the form (and your organization) is perceived.
The significant activities section asks for a detailed account of the three largest program services, including total expenses and revenue (if applicable) for each. By elucidating the significant activities, it ensures your organization remains in alignment with its stated mission and purpose.
In terms of governance structure, Form 990 wants to understand how your organization is run. It asks for information about your organization's governing body, including the number of voting members, any family or business relationships among officers, directors, trustees, and key employees, and whether there are any governance policies in place, such as a conflict of interest policy, whistleblower policy, and document retention and destruction policy.
Next, the form dives into the nitty-gritty of financial details. It's broken down into categories for clarity and thoroughness. Revenue streams need to be broken down into their components - contributions, program service revenue, investment income, and other revenue. The expenses section requires itemized reporting of grants and similar amounts paid, benefits paid to members, salaries, and other employee benefits, professional fees, and other expenses.
Assets and liabilities, on the other hand, provide a snapshot of your organization's financial health at the end of the tax year. They show what your organization owns (assets), and what it owes (liabilities).
Form 990 also includes a section dedicated to potential conflicts of interest. This is where the organization discloses any financial transactions or arrangements that could benefit the private interest of an officer, director, or trustee.
The compensation of officers section is designed to maintain accountability by displaying the total compensation provided to each officer, director, trustee, key employee, and five highest compensated employees.
Lastly, there are sections for other IRS filings and tax compliance, including disclosures about your organization's lobbying activities, transactions with related parties, and noncash contributions.

Reviewing and Submitting the Form

Once completed, the form should be reviewed carefully for errors and omissions, signed by an officer of the organization, and submitted to the IRS. The deadline for submission is the 15th day of the 5th month following the end of your organization's taxable year.

Remember, Form 990 is not just about maintaining your tax-exempt status, it is a comprehensive tool for evaluating a nonprofit's financial health, operational effectiveness, governance practices, and compliance with certain federal laws. This is why it is a crucial document not just for the IRS, but also for maintaining trust with your stakeholders, donors, potential donors, and the public. Embrace it as a critical part of your nonprofit's financial and operational health.