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Weekly UpdatesThe first draft of the revised Form 990 issued by the Internal Revenue Service in June 2007 was discussed in this column a few months back. At that time, the IRS had received many comments in response to its request. It promised to review the comments carefully and issue a final draft before the end of the year. The IRS kept its promise.
The IRS posted the final draft version of the new Form 990 on its Web site and notified interested parties. In addition to the forms, the IRS also issued a background paper, and overview of the new form, proposed changes to the use of Form 990-EZ and highlights of the changes to the previous draft.
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You can access these items at the IRS Web site (www.irs.gov) and clicking on the Charities and Non-Profits tab.
A review of the final draft shows the IRS took many of the comments to heart and made substantial changes to the first draft. You will find many of these changes helpful to you in planning to complete your returns for years beginning in 2008.
CHANGES TO FORM 990-EZ
The IRS is moving to eliminate the "simplified" filings that smaller organizations can use. The idea is that all organizations required to file the form will use the core 990 and whatever schedules are required.
However, a change to the new form for 2008 could be problematic for small organizations. Therefore, the IRS is phasing in required use of the new form by allowing more organizations to use Form 990-EZ for a period of time. Currently, organizations with gross receipts of less than $100,000 and total assets of less than $250,000 can file Form 990-EZ. That will continue for years beginning in 2007.
When the new Form 990 comes in for 2008, organizations with gross receipts of less than $1 million and assets of less than $2.5 million can file on Form 990-EZ. The EZ will allow use of some of the supporting schedules for the 990 and the IRS has eliminated some currently required information. For the 2009 tax year, the EZ filing limits drop to gross receipts of less than $500,000 and assets of less than $1.25 million. The final filing limits in 2010 will be gross receipts of less than $200,000 and assets of less than $500,O00. The threshold filing requirement for filing either Form 990 or 990-EZ will be gross receipts of $50,000 or more. Smaller organizations will have to file the postcard Form 990-N.
CHANGES TO FORM 990 CORE FORM
Form 990 will still consist of a core form, required for all fliers, and supporting schedules to be used as needed. However, the IRS has dramatically changed the core form from the June draft.
Part I will still be a summary of your organization's activities. However, the Service has eliminated all of the proposed percentages and ratios on the draft form. The final form will require summary information on revenues, expenses and balance sheet totals for both the current year and the previous year. This will allow users to see trends in your organization's activities.
The form also contains some governance and general questions, such as the number of voting members on your governing body and the number that are independent. It also asks for an estimate of the number of volunteers you involve in your activities as well as your total number of employees, the gross amounts of unrelated business income and the net taxable unrelated business income. You will also have to briefly describe your mission or most significant activities. Part II is the signature area.
In response to many comments, the IRS has moved the Statement of Program Service Accomplishments to Part III on Page 2. You will have to describe your three most significant achievements and summarize the others. For each listed activity and the others in total, you will have to provide the total amount of expenses, the amount of grants included in that total, and the amount of any direct revenue generated by the activity. In addition, you will have to describe any new program service activities and any you have ceased conducting. The form will contain a free-form Schedule O to enable you to describe these and provide any other required or voluntary explanations you want to include.
Part IV of the final form contains an exhaustive list of questions. Positive answers will require you to attach one of the supporting schedules. Part V asks about other IRS filings and tax requirements that may apply to your organization. The IRS has reorganized the list so it begins with requirements that apply to all fliers and then asks about those that are directed to specific categories of organizations.
Part VI contains questions about governance, management and disclosure. This was a highly controversial part of the draft form. The IRS has made a number of changes to these questions. The form indicates that many of these questions request information that is not required by the Internal Revenue Code. The questions are divided into three sections--Governing Body and Management, Policies, and Disclosure. The question focused on conflicts of interest no longer asks for the number of transactions reviewed.
The questions about board review of Form 990 before filing now asks whether the form is provided to the board before filing and asks for a description of who is provided the form before filing and the level of review undertaken. Numerous other changes were made to the questions, and Schedule O will now give you a change to explain any answers you feel need further clarification.
The compensation section is now in Part VII of the form. You will have to provide information about all officers, directors, trustees and key employees, whether or not they receive compensation. The threshold for the five highest paid other employees will increase to $100,000. If you compensate former officers, trustees, key employees or the five highest compensated, you will use a five-year look-back period and a $100,000 threshold. If you compensate former directors or trustees (using the same look-back period) who currently receive more than $10,000 in that capacity, you will have to list them. All fliers of Form 990 will have to provide this information. All thresholds include compensation paid by related organizations.
No addresses are required in this Part, but Part VI, question 11 asks for an alternative address for anyone who cannot be reached at your organization's address. You will have to use Form W-2 or 1099 information to report compensation from both your organization and related organizations. There is a box to report the estimated amount of other compensation, including retirement plans and other deferred compensation.
Part VII includes several questions that will direct you to complete Schedule J. For most individuals listed, the Schedule J requirement will be a total of $150,000. There is also a question asking if any unrelated organization paid compensation to a listed individual. The highlights issued by the IRS indicate that this will only include situations structured to avoid disclosures. Therefore, it should not include individuals who volunteer for your organization while being paid by someone else.
Part VII also asks for the five highest paid independent contractors who receive more than $100,000 from your organization. It is no longer limited to professionals. You will also have to provide the total number of independent contractors paid more than $100,000.
Part VIII contains your statement of income. Contributions are broken out into five subcategories (federated campaigns, membership dues, fundraising events, related organizations and government grants) plus a line for others. Program service revenue has five untitled lines for entering categories. This part has columns for reporting amounts that are related, unrelated or excluded from classification as unrelated business income.
There are no longer exclusion codes for the last category. For Section 501(c)(3) and Section 501(c)(4) organizations, some of the revenue shown in this part may relate back to the programs you described in Part III.
The statement of functional expenses is in Part IX. If your organization is exempt under IRC Section 501(c)(3) or (c)(4) you will still have to break down each item between program services, management and general, and fundraising. There are additional lines for reporting compensation of non-employees, and some additional descriptions. You will have to show compensation of officers, directors, trustees and key employees, as well as other disqualified persons, separately from other compensation. These amounts will be on a fiscal year basis and will not tie in to the amounts in Part VII.
Part X is your balance sheet. It is essentially unchanged from the draft, although some of the lines have been changed. As on the draft, all of the supporting information will be provided by using Schedule D. Finally, Part XI has been added to ask several questions about your financial statements and reporting. There are questions about your accounting method, the use of independent accountants, audit committee, and whether you are subject to the audit requirements of OMB Circular A-133.
The IRS has done an exceptional job of responding to the comments submitted by the exempt sector, other users and their advisors. However, completing the new Form is going to be a challenge. There are a number of changes to the supporting schedules, and the revised instructions are not yet available. We will advise you of these items in a later article. In the meantime, we urge you to download the final draft and review it for yourself so you can determine what new information you will need to have for next year's filings and begin to compile it now.
Harvey Berger is a retired tax partner with Grant Thornton and currently serves as a consultant on nonprofit tax issues. His email is harvey.berger@gt.com. D. Greg Goller is Grant Thornton's National Partner-in-Charge of Not-for-Profit Tax Services and is based in the Washington, D.C. area office. His email is greg.goller@gt.com
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