Read this if you are at a not-for-profit organization.
With autumn now in full swing the NFP tax team finds itself in the calm before the storm with the 990 filing deadline on August 15 firmly in the rearview mirror and the November 15 deadline looming—much like winter. This brief lull between deadlines allows for a period of reflection. I myself have been reflecting on some of the issues I’ve seen over the past filing season on Form 990s, which I felt compelled to share. Here is my top five list of observations of this year's Form 990 filings.
Schedule B reporting
By now, most are familiar with Schedule B of Form 990. One of the lone holdouts from the pre-2008 “old” Form 990 (back when we only had Schedules A & B, now Schedules A all the way to R), Schedule B generally requires organizations to list out any donor who contributed $5,000 or more to the organization during the year.
While the disclosure appears straightforward, one of the variables that did change back in 2008 was that Schedule B is now required to be reported on the same accounting method as the organization’s books and records, and not exclusively on a cash basis, as was the requirement under the old rules.
Often-times we find that certain sections of the 990 information request are divvied up and completed by different organizational departments, with Schedule B often being tasked to the folks in the organization’s development/fundraising department. Because of this, we sometimes receive back information that is not reported correctly.
Unfortunately, the only way we know if there’s any issue is if total contribution income on the financial statements is less than is what is being reported to us on the Schedule B worksheet. Almost always, we find there’s a donor (or two) making payments on an amount previously pledged and the amount of cash received in the current year is being disclosed on Schedule B, which is incorrect.
(Note: the example above implies the organization is on the accrual method of accounting, therefore the amount pledged was recorded as revenue when pledged. Subsequent payments on said pledge would not be recorded as revenue, causing the disconnect between contribution income for financial statement purposes and what is reported as contributions on Schedule B).
The rule of thumb is that organizations should follow what was recorded as contribution revenue during the year on the books (whether on a cash or accrual method of accounting) and then compile your list of donors from there. We could debate all day the somewhat intrusiveness of the Schedule B disclosure requirements, so we only want to disclose those that must be shown.
Conflicts of interest
It’s considered a best practice for all NFPs to check for any conflicts of interest (specifically with members of governance and management) at least annually. While most organizations do this diligently and far more often than once a year, I want to point out that the 990 has an entire schedule devoted to reporting of “interested persons”—that being Schedule L. Interested persons go beyond just corporate officers and members of the board; they also can be family members as well as business entities that are more than 35% owned or controlled by any of the above. Your organization may want to review your procedures as to how you identify potential conflicts to make sure you are also capturing these sorts of relationships.
Reporting thresholds for Schedule L disclosure can vary. If, for example, a board member’s child works for the organization and is paid more than $10,000, they are required to be disclosed and the board member is not considered to be independent by the IRS. Transactions with a business entity owned or controlled by an interested person has reporting thresholds of $10,000 for a single transaction, or $100,000 over the course of the year.
We offer a detailed conflict of interest survey that addresses these questions and more. If interested to learn more about this, please speak to your engagement principal.
Compensation to unrelated organizations
It seems more and more each year we hear some variation of the following: “X sits on our board and works here at the organization, but we don’t pay him/her directly—we pay their company.”
It’s important to know the IRS closed up this reporting loophole long ago and requires organizations to report the amounts paid to an unrelated organization for services they render as if you paid the individual directly. A narrative is also required on Schedule J explaining the arrangement. We find in most cases the organization may not be aware of what exactly X receives for compensation, which is perfectly fine. The narrative on Schedule J can explain this and that what’s being reported as compensation to X is the amount paid to the unrelated organization, and not necessarily what X’s compensation is. In any event, it is not appropriate to say that X receives nothing.
Fundraising events
COVID-19 certainly put a damper on most, if not all fundraising events over the past few years, but we’ve started to see some of events come back on the calendar recently, which is a great sign! Just a friendly reminder that if the price of admission to the event is $75 or more, it is necessary to note what items of value a participant is receiving in exchange for the amount of money they pay to attend so they can determine what amount, if any, of their entrance fee is tax deductible.
For example: An organization hosts a golf tournament and charges $100 per person to play. In exchange, the person gets use of a golf cart, a round of golf, and some food/drink on hole 19. The fair market value of everything per person totals $85. In this case, only $15 is tax deductible as a charitable contribution ($100 paid minus $85 value received) and the $85 of value received must be relayed to the attendee.
Should you have any questions as you begin to plan your next round of events, please do not hesitate to reach out to us.
Alternative Investments and Unrelated Business Income (UBI)
What top five list would be complete without at least a mention of UBI? During the pandemic, we saw many clients get more creative in terms of generating revenue sources, particularly in terms of alternative investments that typically come in the form of a partnership interest and can carry with them significant tax consequences, which are not always brought to the forefront at the time the investment is made. More than a few clients have been more than surprised (and less than impressed) to receive a Schedule K-1 at the end of year which not only contains UBI, but UBI that is spread over six different states, some, or all of which may require you to file tax returns. If the alternative investment happens to be domiciled overseas, that can bring with it its own set of obligations. You can read more about this here.
It is vital for all organizations to be engaged in open and frequent communication with their investment managers and advisors (both within and outside the organization) to help ensure a full understanding of what sorts of obligations may stem from an investment. Organizations are strongly encouraged to review and share all relevant investment documentation and subsequent information (i.e., prospectus and any other offering materials) with its finance/accounting department, as well as its tax advisors prior to making the investment.
Just some things for you to think about as the next 990 filing deadline will be here before you know it. I hope you all enjoy the cooler temperatures and colorful foliage, and you all find some time to do whatever it is that brings you joy and peace. As for me, I think it’s time to get a hobby!
If you have any questions about your specific situation, please feel free to contact our not-for-profit tax team.
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