Introduction to IRS Form 990

Nonprofits are required to file IRS Form 990 each year. What is a 990 and what is disclosed publicly on it? 

Transcript

SPEAKER_00 0:03

Welcome to Navigating Nonprofits with Lifeboat Accounting. My name is Amity, and I'll be your captain today as we discuss hot topics around accounting for nonprofits. Lifeboat Accounting is an accounting firm that works exclusively with helping nonprofits stay afloat. We cover everything from accounting to tech stacks, to strategic planning, 990s, grants, board development, and staff training. When I speak at conferences or board meetings, folks have always suggested to me that I needed my own podcast to tell my stories and share my experience. So I'm excited to dive right in and to get to some of my favorite topics and share some special guests with you. Welcome to Navigating Nonprofits with Lifeboat Accounting. My name is Amity, and I'll be your captain today as we discuss hot topics around accounting for nonprofits. Today we're going to be discussing IRS Form 990. Now, I'm going to be completely honest, I absolutely love 990s. It's my favorite tax form to prepare. And I've done them from, you know, the organization's very first 990 up until, you know, the 400-page multi-billion dollar nonprofit organizations. So needless to say, I spend a lot of time, probably 50% of my life, on 990s, if I was being completely honest. And the thing that I really love about 990s is that it's a very helpful comparative tool across multiple nonprofit organizations. It's a very easy way to gather a lot of information on governance and operations and policies and finances where it's all in the same format, regardless of size, unless you're in the smaller 990s, because there's three different forms that you can file depending on the size of your organization. But in general, it's a really nice way to be gathering data across multiple organizations. The IRS Form 990 was redesigned in the I think 2008, and it was the first update since the 1970s that the IRS had completed on reporting for not-for-profit organizations. Before that, it was more like revenue minus expenses, typical tax return, and you just confirmed that you were still in business. When the 2008 form came about, the IRS was really kind of honing in on the colleges and universities. They had sent out a survey gathering information about compensation packages, extra perks that folks may be receiving, and a lot around compliance and endowments. And what came out of that survey was this new form. And it includes a lot of information that is not just revenue minus expenses, include a balance sheet. It's essentially a self-compliance checklist where the main form of the NENID has multiple pages of yes-no questions, where if you say yes to a specific question, sometimes that pops up an additional schedule that you need to file. For example, the one that is not publicly disclosed, the only thing that's not publicly disclosed on the Nine ID is the donor list, and that is Schedule B. So if you were to check the boxes said, if do you have any donations over $5,000, you check the box, yes, Schedule B would pop up and you include the names and addresses and how much you receive for each donation over $5,000. So that's the only schedule that's not available to the public, but all of the others are. And a lot of people look at the 990 as something that you just need to do every year, check the box, move on. And I really encourage nonprofit organizations, especially as funding sources change with the current government situation with the lot of folks losing their funding, there's going to be more competition for donors and private foundation gifts, in my opinion. And as part of that, those private foundations and those educated donors really do read your 990. And so I always encourage organizations to really take the time to look at it as a donor development tool as well, and read it as if you were selecting a new nonprofit organization to contribute to. So on the second page of the 990, there's something called program service accomplishments. And you can list up to your top three program service accomplishments with revenue and expenses on an annual basis. You can also just report one, but you can perform up to three. So that section is the part where a lot of educated donors go and read. And I can't tell you how many 990s I've picked up or looked up online where it said we did ABC, where we are an organization that provides food. We are an organization that preserves buildings. And that doesn't really give the reader a lot of information and statistics. So if you can really look at your 990, spend some time on your program service accomplishments, and really build them out to have statistics, updates, and change it every year rather than just filing it with the same sentence year after year. Because I think that gives you a little bit more of a competitive edge from a donor development tool. So the 990 also has compliance checklists, asks you if you have specific policies, how do you do governance? Do you have a conflict of interest policy? And if so, how do you ensure that it's being fulfilled and what happens if there is a conflict that comes up? So part of it is a written narrative, some of its compliance checklists, some of its financial data, some of it is policies, procedures. There's a lot to it, and I will probably do a second podcast on this because I could talk about 990s probably for days. Um, but just as a high-level introduction, um your 990 is a public document that is out there. And for example, I had one organization that I took over their taxes for, and I said, Did you realize that in the functional expenses someone reported 52% of your expenses are to management costs? And they said, No, is that a problem? I'm like, well, compared to your peers, if they're only reporting 10, 15, 20% of their costs are for the costs of management and you're at 52, guess who's going to get the funding? And so we've had a lot of conversations like that. And I've had some 990s come to me where 100% of the expenses are in the management bucket, and none of it was allocated to the programs and fundraising. And so there's that issue, and then I've also seen 990s where people have written that they don't provide any information available to the public. And that's not the question. The question is, how do you? Because as a public charity, you do have to provide some stuff upon request. So there's some there's some horror stories in there and things that I've seen. And I've also seen people not get funding because of what's on their 990. That one organization that I just mentioned that 100% was in management, they didn't know the board didn't know that their 990 was filed that way until a funder was kind enough to point it out to them. And so we had to amend their 990s for them to be a little bit more accurate. Um yeah, it gets interesting. People think taxes are boring. So my I'm gonna give you five things to kind of think about when you're filing your 990. Uh, I think I also mentioned already that a lot of the charity rating websites read your 990 and um we'll give you sometimes a rating or a grade based on that. So, first things first, what I already mentioned, boast about all the cool things that you do in your program service accomplishments, and take the time to really tell donors and potential funders all the amazing things that you do during the year. Feel free to brag all that you want. The second one is that on page six of the 990 is a section on governance and policies. And I can't tell you how many times I've gone back to an organization saying, Hey, um, you didn't check the box that you have a conflict of interest policy, but in many states, in order to register as a charity, you have to have a conflict of interest policy on file. So um, you may have one and you may not even know. And then there's other questions about record retention policies, um, whistleblower. There's a bunch of different policies that the 990 asks for. And a lot of these are available as templates. We have templates if you need them. Um it's so easy to check those box yeses and get those board approved. And the more boxes that you check no and policies from a funder's perspective, I would fund the organizations that have policies and procedures over an organization that doesn't. Um the next section I'm gonna mention is that you really need to nail down your functional expenses and what the heck is a functional expense. So you may hear in the media, oftentimes in a negative tone, that for every dollar raise, X number of cents goes towards the program or management or fundraising costs. The IRS Form 990 has you break out your expenses between program costs, management costs, and fundraising costs. And a lot of organizations they just hand it to their accountant, and a lot of the accountants just take it for verbatim. If they don't do a lot of 990s, they're not going to question it because it's um you provided the data. But I would encourage you to go back and really look at how you've allocated your costs between program costs, management costs, and fundraising costs. Program costs are specifically things related to what you told the IRS your mission is, and so any costs are kind of related to fulfilling that mission is a generalized, highly generalized example of what you would put there. Management costs would be things like insurance, time, managing the organization, and uh other costs similar to that. Like maybe you have some specific software costs. Fundraising costs are things like your donor database, your fundraising team, if you use any consultants, and any costs related to raising money. So those three buckets, everyone kind of has like an internal or there's like these, I don't know, unwritten rules about what percentages should be what. And to be honest, it's a little bit different for every organization. Some organizations uh almost all of their expenses are programmed, and in other organizations, the program costs are actually covered by volunteers and they tend to have a little bit of a higher management cost rate. But you can also look up on Candid, which used to be GuideStar and a couple other organization websites, or ask your peers to see their 90s to see what ratios they are currently using and compare them to your own just to see if you're an outlier. And then another section that I also wanted to talk about was your Schedule O. So your Schedule O is kind of the catch-all for all of the written narratives and answers to specific questions on the net ID. Um, examples are how does the board review the net ID before it's filed? Uh what's your conflict of interest review process? Uh how do you determine the executive director's compensation? How do you make your documents available to the public? These are all written narrative questions that you can ask and write narratives for. And um again, if I'm a donor, I'm going to be looking for those specific disclosures and comparing you to peers. So, again, part of its compliance, part of its donor development tool. Um really take the time to review your 990. And I also encourage all organizations to have board training on what the NID is and have everyone read it. Because the more eyes on the form, the better, especially for those donor development opportunities as well. Um, I could talk about 990s for days, like I said, I'm gonna stop there. This is just meant to be kind of a high-level introduction, and then if you're interested in learning more, let me know, and I can do a part two and walk through all of the specific schedules if that's helpful. Um, hopefully, everyone has read their 990, and um all of this stuff is kind of review information for you. But if not, it's totally okay, it's all a learning curve. There's no college degree in 990s, and um, it's all just part of learning the nonprofit kind of roles and responsibilities.