Form 990 – Return of Organization Exempt from Income Tax

Section 6033 of the Internal Revenue Code requires tax exempt organizations to file an annual report.  Form 990 fulfills this requirement.  Many citizens utilize the information from Form 990 to evaluate the non-profit organization they donate to annually.  The 990 covers much of the information any citizen desires to know about the charity of their choice.

So how does this form work?  What information can be gleaned from the form?  How do I access the information for reference purposes?

The sections that follow cover these questions and describe and/or illustrate how the Form 990 provides much of the information any donor desires.  In addition to this article, you may desire to open the Form 990 in pdf form in a separate window and flip between this article and a copy of the 990 to better understand the document as you proceed. Remember, the 990 is an IRS document and is the 2012 form.

Form 990

How the 990 Works

The report is divided into five important parts.  The front page is a full summary of the organizations financial activity from the prior year and its financial position.  The second part describes what the organization does, i.e. its mission statement.  This part includes how much of the receipts for the year were used to fulfill this purpose.  The third part covers legal compliance and policies.  This is the really boring stuff for your average contributor.  A fourth part explains who the officers, directors, and key individuals are in the company.  The really important piece of information from this part states how much compensation is paid to anyone earning more than $100,000 during the reporting period.  The final part is a detailed report of the actual receipts and the corresponding expenditures for the reporting period.  This is the juicy part of the tax return. 

The following sections describe in more detail the information reported in each part.  As a reader of the tax return or as a preparer of the return, these sections are important to understand in evaluating the information provided.

Summary

This part of Form 990 is divided into four groupings of information.

Activities and Governance

The first grouping is a set of questions.  It is a simple summation of the mission during the last year plus how many people were involved.  It is simply a list of the number of paid staff, number of board members and the number of volunteers throughout the reporting period.  In addition, if the organization had any form of taxable income, the IRS wants to know how much taxable income the exempt organization is going to report.  This is referred to as 990-T (T is for taxable) income.  Believe it or not, not all revenue earned by a non-profit is considered tax free.  Often, non-profits sell or provide services that do not fall within the mission statement or comply with the charitable aspect of the organization.

Revenue

The next grouping covers revenue.  In general, the government wants to know how much was derived from charitable contributions, program fees, investment earnings, and grant money received.  There are two columns of information and this is beneficial for the reader.  Information is reported for the prior year and the current year.  As a reader of this information, you would want to see an increase in the organizations donations, program fees, and/or grant monies.  This is a key indicator of having a better year than the prior year.

Expenses

The third grouping of information relates to how much of the money received was expended.  It identifies the direct benefits paid out to members or for the program.  There is a separate line identifying the cumulative payroll for the year.  In addition, the reader can determine if the organization spends too much money raising money.  This is important because a well-run organization will spend less than 25% of its earnings from fundraising on the cost to fund raise those same dollars.  This does not mean the organization will spend 25% of all its revenue, only 25% of the money its raises using professional services to raise those respective dollars. 

Finally this grouping identifies the expenses related to normal business operations (rent, office operations, etc.).  As a reader of the information, you really want to see the total of this line to be no more than 18% of total revenues.  The end result is either a positive number which means the organization spent less than it received in revenue or a negative number which indicates a possible expenditure issue or a shortfall in raising money.  In the non-profit accounting terminology, when receipts/revenue is greater than expenditures, we refer to this as Revenues in Excess of Expenditures.  Don’t forget, even non-profits have to generate positive net incomes on the bottom line in order to continue to operate from year to year.  The status as a non-profit only means that any positive bottom line amounts will be held in reserve for the future or used in the future for the mission of the organization.  It is not uncommon for non-profits to make a profit.  The non-profit identifier only means that no shareholder or initial investor will financially benefit from the earnings.

Net Assets or Fund Balances

In the non-profit world, the equity of the organization is referred to as the Net Assets position or the Fund Balance.  It is a simple formula.  Take all assets and subtract the liabilities and you have the equity value of the organization.  The equity position is nothing more than the lifetime accumulated earnings in excess of expenditures.  On the 990, there is column for the prior year position.  Add or subtract from that number the value derived during the current year (from Line 19 of the 990) and you should see this year’s equity position. 

In general, it should increase from year to year as the organization grows and prospers.  There may be some periods of time where more was spent and the equity position decreases.  In some situations, this is not abnormal.  Think of the American Red Cross.  If a disaster occurs just prior to the fiscal year end, it is conceivable for them to expend reserves to provide the services during a disaster.  Hopefully in the following year, charitable donations exceed the costs in that year.  By the way, the American Red Cross is consistently one of the best run organizations in the United States. 

Statement of Program Service Accomplishments

Here the IRS wants to know, what the organization achieved during the fiscal year.  How did the service match the organization’s intended purpose?  For example, I once served on a Board of Directors for a chapter of Big Brothers Big Sisters.  Our 990 stated the number of children served and the number of hours of service (volunteer time) those children received during that respected period.  In addition, we indicated the number of training hours conducted with volunteers and the expenditures associated with home studies and background checks.

I commonly refer to this part of the tax return as the “LOOK AT ME” opportunity.  The organization should proudly state what they did during the fiscal year.  It is one of the few opportunities for an organization to express itself and get the reader to have that warm fuzzy.

Legal and Compliance

This part of the return covers four pages.  It is a series of questions regarding compliance with the exempt status for the non-profit.  In addition, the organization must attach a series of schedules as required.  Some schedules are only required contingent on the response to the associated compliance questions. 

Examples of important schedules include:

  • Schedule B – schedule of contributors that donated more than $5,000 during the fiscal year
  • Schedule D – schedule or list of art or collectibles including historical treasures (Museums)
  • Schedule G – fundraising report including the associated costs (typical charity events)
  • Schedule I – report of any organization or individual receiving more than $5,000 in services/grants
  • Schedule L – excessive benefits or monies paid to prior officers/directors/employees
  • Schedule M – list of non-cash contributions in excess of $25,000 of value
  • Schedule N – net assets transfer to another party exceeding 25% of assets
  • Schedule O – supplemental information

Once the legal questions are answered, a section on the governing body and the associated management comes into play.  Here the IRS wants to know many officers/directors and key individuals are in the corporate structure.  Did the organization hold regular meetings and document these meetings?  Were there any changes to the by-laws or the organization’s governing document?

In addition to the governing documents, the IRS wants to know about any policy changes?  Another key question is did the organization cooperate or get involved in providing services in partnership with a taxable entity? 

All of these make sense because any governing document or policy changes could have a bearing on the tax exempt status.  Remember the goal of the IRS, raise the revenue to run the government and protect the public from scrupulous organizations.

Compensation of Officers, Directors, Trustees and Key Individuals

From a donor’s perspective, you really wouldn’t want to donate to an organization that overpays its officers or key individuals.  I personally would want to know why a charitable organization would pay an employee an extravagant compensation package.  It appears to go against the purpose of why the organization exists.  It is there to serve the public, not over compensate some individuals.  When somebody makes more than $100,000 in compensation, the IRS wants to know who it is and what is their position with the organization?

Now readers of financial information need to put this in perspective.  If you have an organization that has revenue in the $3,000,000 range and it pays an executive $70,000 or so to manage and run the organization; that would be reasonable.  If you are the American Red Cross, it will take many highly educated and experience individuals to manage this $200 M plus organization.  It would not be unreasonable to have several individuals paid more than $150,000 a year in compensation for their services.  However, paying somebody $1,000,000 to run a $200,000,000 organization would seem unreasonable.  So a reader needs to put the compensation package into perspective.

 Statement of Revenue and Expenses

The final part of the 990 covers the various sources of revenue and the expenditures during the fiscal year.  This is the best part of the Form.  It really lets the reader know how the organization did during the prior year.

On the front page of the 990, the Summary Part has a summation of revenue.  In a non-profit; revenues are received from the following sources:  

Federated Campaign – a United Way fundraising program whereby large corporations allow employees to donate to the charity of their choice through a payroll deduction.

  •  Charitable Gifts – This is the most common belief of the general public as the source of cash for a non-profit organization.  Although a source of cash, for most non-profits, it is not the primary source of cash.  Charitable gifts or giving is generally the life-blood of non-profits because these are the true marginal dollars needed to fulfill the mission of the organization.  In general, if any donor contributes more than $5,000 than that donor’s name is recorded to Schedule B – see above for a more detailed description of why this schedule is required.
  •  Government Support – All levels of the government strive to meet the needs of the citizens by utilizing non-profits.  The governments will purchase services or provide grants or gifts to the non-profits to augment that organization’s funding.  A grant usually comes with some sort of outcome requirement.  During the last ten years, governments have generally converted to some form of matching requirements or have limited the grant’s proceeds to a specific need.  In the past, grant monies were used to supplement the overhead element of the non-profit.
  • Fundraising – This is the most common interaction format for the non-profit and the general public.  From the car washes to the sales pitch for products, the general public interacts with the non-profits regularly.  How can you not have been approached by a girl scout to buy cookies?  My favorite is the peanut butter ones.   
  • Non-Cash Contributions – All of us have visited a thrift store to purchase some ware.  Well, this is the perfect example of non-cash support for many organizations.  Other examples include Toys-For-Tots and the Food Bank donations.  The IRS wants a value of the non-cash contributions to compare to the dollar value of the mission.
  • Membership and Program Fees – For many non-profits, this is the primary source of revenue.  Many membership based organizations (YMCA, Social Clubs, and Neighborhood Associations etc.) derive the needed funding from membership fees.  Other non-profits charge a fee for the services they provide, especially for services rendered for the government.  The most common non-profit that charges a program fee are medical facilities.  More than half of all hospitals in the United States are non-profit organizations.  In some localities, the local hospital has more revenues than the local government.  There fee structures are paid by insurance, government derived sourcing such as Medicaid, Medicare or from fees charged directly to the patient.
  • Investments – Many larger organizations have foundations to provide sources of cash.  These foundations receive money in the form of gifts and invest the monies.  The earnings are used to augment the program.  The most common foundation formats are educational based foundations.  The donated proceeds are sometimes unrestricted and can be used in format authorized by the Board or sometimes the proceeds are restricted and must be endowed (permanently set aside) and the earnings are used at the discretion of the Board.
  • Taxable Income – It is not uncommon for a charity to sell products in direct competition with taxable business operations.  They may sell services or products and the IRS requires them to report this income via an attachment known as the 990-T.  The letter T is for taxable income.

In Part VIII of the Form 990, each of the above elements of income is reported on its own separate line of the report.  Here the reader can break the income down into the respective sources and determine if the organization is relying too much on one format of revenue.

Just as a reader is interested in the sources of revenue, he would also be interested in knowing how the money is used.  Part IX of the 990 breaks out the expenditures into three sub-classifications.  How much of the money is spent to meet the program requirements and how much is spent for management and general office operations.  The third classification is the dollar amount spent to raise money for the organization.  This section of the 990 resembles the expense section of the income statement or profit & loss statement.

The last page of the 990 identifies the balance sheet items of the organization.  Similar to a regular balance sheet, there are assets, liabilities (what is owed) and the equity of the organization.  The equity section is referred to as Net Assets in the non-profit world.  If you desire an understanding of how to read a simple balance sheet, read the following article:  How to Read a Simple Balance Sheet.

Important Information

In the section above, I explained the five major parts of the 990.  There are as follows:

1.      Summary of activities & governance; revenues, expenses and net assets (fund balances)
2.      Program Accomplishments – a statement of what the organization achieved during the year reported
3.      Legal & Compliance – questions about conduct and other information reported via a set of schedules
4.      Compensation of Officers, Directors, Trustees and Key Employees
5.      Detailed Statement of Revenues, Expenditures and a Fund Balance (Balance Sheet)

As a reader of the above information, you should place emphasis on how the organization received its funding and how much was spent on the mission.  Larger organizations such as the Red Cross or the American Heart Association can achieve an economy of scale and get a greater percentage of their revenues to fulfill the mission.  The smaller organizations such as your local boys and girls club will have a more difficult time achieving an 80% ratio of total program expenditures to total revenue.  So use some discretion in evaluating the organization.  Many of the smaller non-profits have no payroll at all.  Examples include your Little League chapter or the local high school band.  Here, costs are borne mostly by the volunteers and it is not uncommon for the organization to have a very high percentage of program expenditures to total receipts.  It is when the organization begins to have professional staff to support the mission that auxiliary costs are required such as office space/utilities/insurance etc.  So as a reader use some discretion in interpreting the information.

Other types of information that can be gleaned from the 990 include how much is spent to fundraise the dollars.  What is the compensation package of the highest paid staff?  What exactly is the organization’s mission and how much was truly spent achieving the mission.

As you read the about the five parts above, all these questions are answered.  As a donor, you have greater confidence in the organization you contribute to in life when you fully understand the finances.

How to Access the 990

After the IRS receives the report from the non-profit, the IRS posts the information for the public to see.  Many states require non-profits to report the information to one of the state agencies and that agency can provide you with your charity’s report via a request. 

As for the IRS, they post the information to a non-profit organization called GuideStar.  Create a log-in and use the search tool to find your organization.  Click onto the 990 forms and click the most recent year available.  Remember, they are generally about one calendar year behind in the reports because most non-profits tax year end on June 30 of the following calendar year.  Then they too have 90 days to file the report and it takes the IRS and additional 4 months to upload the data.  So in general, it takes about a year to see data from last year.  So the information is aged quite a bit by the time you get to read the reports.

Summary

This article explained how the Form 990 is broken out into five major reporting parts and supplemental schedules.  Each part provides information to the reader critical in understanding how the organization accomplishes its mission.  A reader can evaluate the overall effectiveness of expenditures against the revenues raised and furthermore understand if any employee is compensated too much.  By going to www.guidestar.org any citizen can sign up and gain access to any non-profit organization’s Form 990.

When the public is empowered with this information, they can make wise choices as to where they want to contribute their charitable dollars.  Act on Knowledge.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org.  I would love to hear from you.  If interested in my help as an accountant or consultant, contact me through the ‘My Services’ page in the footer.  

If you found this article helpful, please consider a donation to the site.  The donation button is just to the right.  Even if you don’t make a contribution, I encourage you to read more articles on the website to help you become a better business entrepreneur.

Other articles that may be of interest to you:

Introduction to Non-Profits – there are many different types of non-profits in the business world.  A good example is your homeowner’s association.  The IRS allows them to avoid income taxes contingent upon meeting certain requirements.  This article introduces the reader to the various types of non-profits and the general terminology used.
The 501(c)3 Organization – this is one of the many forms of a non-profit and its status.  The Code Section 501(c)3 allows gifts from individuals to be tax deductible.  Whereas gifts to a homeowner’s association are not deductible.  This article introduces the reader to this form of exemption and how important the status is in the eyes of the public.

How to Start a Non-Profit Organization – an introduction to starting a non-profit is explained and the article begins a step by step process to form a non-profit organization.

Fundraising with Golf – there are many ways to raise money for a charity.  Golf is a fun event however it is a demanding event for resources.  This article explains the event and how you set it up.  It continues to explain and illustrate the math involved and provides insight for the reader as to the return on the investment of resources.  Gain an understanding of how much you should expect to raise from this type of event.

About David J Hoare 429 Articles

I spent 12 Years as a Certified Public Accountant,
Over 20 Years of Practice in Accounting and Consulting,
Controller in Management of Closely Held Operations,
Masters of Science in Accounting,
Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns

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