As a nonprofit organization or ministry, you may have heard the term, “990” and wondered what in the world it was. Since the 990 is a critical necessity in maintaining your IRS tax exempt status, it is crucial that you understand how to read the document, some basic requirements and what to look for.
Essentially, a 990 is a nonprofit’s tax filing. Recognizing that nonprofits do not have to pay taxes on their “profits,” they are responsible to file a document that records their revenues and expenses and discloses how the money was spent. Nonprofit organizations are beholden to the public trust—this means that the general public has a right to know what funds came into the organization and how they were spent.
According to the IRS, the requirements to file are as follows:
Form 990 – must be filed if the organization has gross receipts of $200,000 or more or assets of $500,000 or more.
Form 990-EZ is the short form and can be used if the organization’s gross receipts are less than $200,000 and total assets are less than $500,000
Form 990-N (e-Postcard) can be used by organizations whose gross receipts are $50,000 or less.
It is important to know that if the organization is classified as a religious organization or church that it is not required to file a 990.
It is also important to note that if the organization wants to apply for grant funds, many foundations will require a 990 even if the IRS does not.
How to Read the 990
Because nonprofit organizations are tax exempt, their tax filings are public information. Many organizations have them on their websites, and you can access them by going to www.guidestar.org. Unfortunately, the document is a challenge to read and the information contained within is often confusing and misunderstood.
Some key points as you review a 990:
- Know that the first page is simply a summary of all information contained within.
- The 990 shows the full income received by an organization during the organization’s fiscal year.
- The 990 also shows the expenses paid by the organization during the organization’s fiscal year.
- The 990 does not show any expenses that might have come into the organization right at the end of the fiscal year. In other words, if an organization receives a large donation on the last day of the fiscal year for a specific purpose, it will appear that the organization has a large sum of money in the bank. However, in reality the funds are designated, or restricted for that purpose.
The balance sheet should be read as a point in time—not a specific, overall measure of the organization’s health. For instance, suppose you receive your paycheck on Friday, if someone were to look at your bank account on Friday evening, they would see a nice balance. However, you are well aware that the balance is only temporary until you pay your mortgage, utilities, car note, etc.
Part VII asks for the names of board members, key employees and highest compensated employees. It is important to know that foundations and other funders will look at this section and make a determination as to whether or not they consider the salaries reasonable. It is not considered a best practice to compensate board members; note, this does not include reimbursing board members for expenses.
One area that if often scrutinized is part IX. In this section, the total amount of money spent by the organization during the fiscal year is broken down into functional expense areas. Functional expense areas are broad categories – program expenses, management and administration expenses and fundraising expenses. Know that best practices dictate that the majority of the organization’s resources be spent on the provision of program services-for this reason, it is important that your expenses are allocated appropriately in your accounting system. Even if you have an accountant complete the 990 for you, it is your responsibility to review and verify the information contained within.
It is important to ensure that the appropriate 990 is filed with the IRS. In the event a 990 is not filed, the IRS can revoke tax exempt status.
Understanding the 990 can be a challenge for non-accountants, but is absolutely essential so that you are prepared to answer questions about the organization’s use of funds and its overall financial health.