Understanding Form 990: Key Tax Insights for Not-for-Profits

BROOKS: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters. Welcome to this edition of the Cherry Bekaert Tax Beat podcast. Today we are talking about the tax rules for tax-exempt organizations.

BROOKS: The tax law cares a lot about tax-exempt organizations for two main reasons. First, organizations must follow rules to protect their tax-exempt status. Second, the rules ensure donors can take tax deductions for their donations.

BROOKS: Joining today in our conversation is Paula Winling. She is a director and a leader among our tax professionals providing Tax Services to Not-for-Profit organizations.

PAULA WINLING: Hi, Brooks. I'm doing well. I'm calling in from Palmer Lake, Colorado.

BROOKS: Where is Palmer Lake, Colorado?

PAULA WINLING: It's southwest of Denver, about an hour. I'm tucked against the Pike National Forest.

SARAH MCGREGOR: I'm jealous. I love it out there.

BROOKS: As always, joining me is my partner in crime Sarah McGregor from Greenville, Mississippi. How's life treating you, Sarah?

SARAH MCGREGOR: It's good to be here. I love talking about Not-for-Profit organizations.

BROOKS: You're going to get plenty of opportunity to do so. The background for today's conversation is the annual information return for a tax-exempt organization, Form 990. There are different variations of Form 990, but the main Form 990 contains lots of questions, many schedules, and a lot of information.

BROOKS: These forms are used by the IRS and others to see if the organization is in compliance with tax laws. They are also used heavily by potential donors to evaluate the financial health and governance of the organization.

BROOKS: If you're serving as a board member, one of the major responsibilities is to review and sign off on the Form 990, and to be generally aware of the requirements and what the form reports.

BROOKS: Paula, let's talk about some of the pages in Form 990 and what board members should see and think about. What are Pages 1 and 2, other than being Pages 1 and 2?

PAULA WINLING: Pages 1 and 2 are the most important pages to focus on if you need a quick look at the Form 990. They give a sense of the organization's primary mission and purpose, provide a high-level summary of the organization's finances for the year, and summarize key programs and accomplishments.

PAULA WINLING: Those pages act as a front-facing summary of the organization, which is important for donors and the public.

BROOKS: I think about tax forms and Pages 1 and 2 usually show taxable income for the year, but for this form, revenue and expenses don't show up until Pages 9 and 10, much later in the form.

PAULA WINLING: We do get a summary on Page 1, but the real detail appears further back in Form 990. Items like types of investment income, income from alternative investments, or business ventures show up later. Those details reveal how the organization uses its assets to generate income that supports its charitable mission and whether any income might be subject to the unrelated business income tax rules.

BROOKS: True or false: the schedules attached to Form 990 are longer than the main form.

PAULA WINLING: It depends on how many schedules an organization has to file, but in some cases the schedules are much longer and can seem voluminous.

BROOKS: We talked a bit about revenue and how it can come from fundraising, operations, or investment activities. Expenses are also detailed, showing what's program-related and what's the cost to raise money or operate the organization. The IRS seems to key in on certain items, particularly compensation for officers.

PAULA WINLING: The IRS looks to determine if the governing board is managing the organization well and following good governance policies. Compensation is an important area of disclosure. Compensation packages for officers, directors, key employees, highly compensated individuals, and some contractors are publicly disclosed. That allows the public to oversee what is happening in the organization and ensure no individual or group is gaining personally from the organization.

SARAH MCGREGOR: I think that's a good guardrail. Sometimes people in the CPA world feel pressure to find other reporting methods because organizations are worried about that disclosure.

BROOKS: Let's talk about private benefit and private inurement rules. Can you describe those and tell us what a board member should look for?

PAULA WINLING: A private benefit can benefit anyone inside or outside the organization. The question is whether anyone is receiving excess personal gain from the organization. That could be excessive compensation to employees, even if they are not decision makers, or a charitable program that benefits only a small, specific group—for example, scholarships given to family members of only two families.

PAULA WINLING: Private inurement is similar but focuses on insiders—individuals with influence over the organization, such as founders, governing board members, or managers. Private inurement involves personal gain to those insiders and can include business transactions where payments exceed market rates.

PAULA WINLING: Board members should be aware of the types of transactions the organization undertakes, who benefits, and whether transactions are conducted at arm's length.

BROOKS: Related question: conflicts of interest and transactions with interested parties—what's your quick rundown?

PAULA WINLING: These issues can overlap. The tax statute does not require an organization to have a conflict of interest policy, but we strongly advise tax-exempt organizations to adopt and implement one. The board should be aware of any conflicts, including business transactions or family relationships, and disclose them regularly—most organizations do this annually.

BROOKS: I can't let this go without at least mentioning unrelated business income. Can you give the two-minute version?

PAULA WINLING: Unrelated business income is income generated by the organization that is not related to its core mission. It can come from business investments that are passive or from ancillary ventures that are important to the organization but are still unrelated to the key mission. Organizations should understand where their revenue is coming from and whether any income is subject to unrelated business income tax.

BROOKS: Paula, you work with both small Not-for-Profit organizations and larger institutional organizations. What key differences do you see in the services you provide or the questions they ask?

PAULA WINLING: Small organizations often need help implementing good internal controls when they have only a few people involved. I've seen well-intentioned people who don't realize it's risky to have a single person open the mail, write checks, balance the books, and send out financial reports. It's best to separate duties and involve multiple people.

PAULA WINLING: Small organizations are also focused on fundraising and maintaining public support status, ensuring they have a broad donor base, and determining how to grow and implement their mission effectively.

PAULA WINLING: Larger, more mature organizations have typically addressed internal control issues and focus on preventing mission drift. They want to ensure what they present on Form 990 is consistent and complete with respect to their activities so they can accurately tell the public what they are doing and how they benefit their communities.

BROOKS: Internal control issues with small tax-exempt organizations can be serious. It's not uncommon to find a long-trusted employee who starts taking small amounts and over time that grows into hundreds of thousands of dollars. The organization gets tainted by it, and it's a challenge to overcome that negative impact.

PAULA WINLING: Board members, especially inexperienced ones, may not realize how much oversight they need to provide, particularly in smaller organizations.

BROOKS: Form 990 reporting can be extensive and complicated. Some board members, organization members, or executives may not understand how much reporting is required, the schedules that must be prepared, the questions to be answered, and the policies to be reviewed. It's a pretty exhaustive and difficult effort.

PAULA WINLING: Form 990 is one mechanism used to give the public oversight of tax-exempt organizations. Although it may seem counterintuitive that exempt organizations file so much reporting, the reporting shows that organizations truly deserve their exempt status.

PAULA WINLING: Anyone can search the IRS website for tax-exempt organizations using the Tax Exempt Organization Search tool to find an organization's exempt status and often prior years' Forms 990 in PDF format.

SARAH MCGREGOR: The IRS search tool is helpful, and there are other websites where information can be found. A big caveat is that churches and governmental entities are not required to file Forms 990, so you won't generally find those filings online, although some volunteer filings do exist.

BROOKS: That brings us to final comments. Paula, any last words of wisdom?

PAULA WINLING: Remind board members that when they join a board, they agree to exercise fiduciary responsibility. That means knowing the organization well, understanding how it works, paying attention to its activities, and ensuring the mission and purpose are being carried out.

BROOKS: Could you have said that better? That's all you got?

PAULA WINLING: That's it.

SARAH MCGREGOR: I would add: don't be scared to serve on boards because it can sound intimidating. Most state laws provide liability protection for Not-for-Profit board members as long as they are not engaging in egregious or intentional criminal conduct. Nonetheless, it is the board's job to help protect the organization.

SARAH MCGREGOR: Tax accountants are often asked to serve on boards, particularly to help with accounting, financial reporting, and reviewing Form 990, so enjoy it.

BROOKS: That's a wrap on today's discussion about tax issues for Not-for-Profit organizations. Quick disclaimer: we are not providing tax advice on this podcast. Please consult with your tax advisor, ideally at Cherry Bekaert, about specific tax issues or to discuss information from today's podcast.

BROOKS: Check the firm's website at cb.com for the latest guidance and materials on this and other tax and business topics. This concludes today's podcast. Please like, share, and subscribe.

BROOKS: Thank you, Paula. Thank you, Sarah. Thank you to our listeners for spending your time with us. Let's call it a day and go forth in peace.