Form 990 – Lorman Seminar Presented by Terry Miller

I attended an excellent presentation on "Form 990:  Critical Issues" given by nonprofit financial management consultant Terry Miller for Lorman Education Services on April 18, 2006.  Terry’s coverage of Form 990 included the following areas:

  1. Tax Overview for 501(c)(3) Public Charities – Regulatory Viewpoint
  2. Form 990:  Procedural Overview
    • Filing requirements
    • Importance of "complete and accurate" and the statute of limitations
    • Due dates and extensions
    • Penalties and abatements
    • Penalties and the Attorney General
    • Public disclosure, the importance of Form 990 as a public document, and the value of a disclosure copy
    • Schedules as footnotes for transparency
    • and the rise of charity "watchdogs"
    • IRS’ page on Tips and Common Errors
    • Accounting method:  introduction to GAAP v. Tax problems
  3. Reporting Income
    • Earned v. donated
    • Memberships
    • In-kind gifts – noncash gifts vs. donated services and facilities
    • Events and deductibility
    • Donor receipts
    • Commerciality, unrelated business income, analysis and exclusion codes
    • Reporting investment income
    • Schedule B
  4. The Public Support Schedule
    • Advance ruling periods, Form 8734 and life after the final ruling
    • Form 8734 now wants Form 990 workpapers for Line 26b
    • Most common errors on Support Schedule
    • Same schedule of excess contributors
    • Clarifying 509(a)(1) and (a)(2)
    • 509(a)(1) "Facts and Circumstances" response
    • Overview of 509(a)(3) and 509(a)(4)
  5. Reporting Activities, Expenses and Compensation
    • Functional allocations:  program, administration, fundraising
    • Functional costs:  public perception
    • Joint costs:  mixed purpose expenditures
    • Program service accomplishments
    • Grantmaking
    • Compensation and transactions with current and former insiders
  6. Political and Lobbying Activities
    • Candidate electioneering
    • Lobbying and Section 501(h) electing charities
    • Disclosure of relations with 501(c)(non-3)s and 527 political organizations
  7. Miscellaneous
  8. Outlook
    • Current IRS enforcement stance and hot buttons
    • Known audit flags
    • Congressional action – status report

The walk-through of Form 990 was particularly helpful.  Here is just a small sample of the points I found valuable:

  • Part II (Statement of Functional Expenses) requires organizations to allocate their expenses to "program services," "management and general," or "fundraising."  Organizations can easily manipulate the allocation to boost the relative percentage of expenses devoted to program.  This is an area that may be ripe for intense media and regulatory scrutiny.  Organizations are advised to be truthful, but they should consider presuming that expenses are program expenses if they are not clearly management and general or fundraising (i.e., supporting) expenses.  Supporting expenses equal to about 20-25 % of total expenses may be viewed as fairly conservative.
  • Line 22 now contains a subquestion asking if the amount entered for "grants and allocations" includes foreign grants.  This subquestion is also asked in Part III.
  • Line 25, "Compensation of officers, directors, etc.," includes compensation of key employees and the amount entered should equal the total of Column C of Part V-A.
  • Part III should be written with input from the organization’s development officer because this page is an opportunity for the organization to brag about its "achievements" and may be the basis by which donors and foundations decide upon making a gift to the organization.  Form 990 is a public document – use it to your advantage.
  • Part V-A, column B asks for the title of current officers, directors, trustees and key employees.  If an individual holds both an office and a seat on the board, identify both positions (e.g., President and Director).
  • Line 75d asks about a written conflict of interest policy.  It is highly recommended that an organization’s board adopt such a written policy.
  • Line 81 presents a trap as political expenditures are prohibited to 501(c)(3) organizations.
  • Schedule A, Line 2c includes amounts to certain insiders that were given as reimbursement of expenses.  This may be particularly common where key employees are required to travel in the scope of their duties.  If the answer is "Yes," the statement explaining the transaction might include something to the effect that reasonable and actual expenses incurred in the ordinary course of business were reimbursed to key employees (and other insiders) upon presentation of original receipts and pursuant to an expense reimbursement policy.  Such policy might provide for limitations to items like first class travel, meals over a certain amount, etc.
  • Schedule A, Part IV-A (Support Schedule) asks for financial information not from the current year (i.e., 2005), but instead from the previous four years (2001-2004.  The rationale is that if the (public charity) support test is met during such four-year period, the organization has the privilege of filing Form 990 (and not Form 990-PF) for the next year (2006).
  • Schedule A, Part VI-A and B (Lobbying Expenditures).  Don’t be deceived by the possible initial impression that it would be easier to complete Part VI-B as a nonelecting public charity rather than Part VI-A as an electing public charity (i.e., one that has made the IRC 501(h) election).  Note that Part VI-B directs charities that answer "Yes" to any of a-i to "attach a statement giving a detailed description of the lobbying activities."  Benefits of the 501(h) election are discussed in the Lobbying section of this blog and may also be reviewed here at the Alliance for Justice website.

Thumbs up!  If you have the chance to see Terry, you may find it well worth the cost.