Nonprofit 411: Tax Update: Understand the Recent Changes to Form 990 to Avoid Common Mistakes

Pagnozzi, Jeanne

By Jeanne Pagnozzi, CPA, Manager at BlumShapiro

The IRS Form 990, Return of Organization Exempt from Income Tax is one of the most intricate tax forms there is and can be a pitfall for many organizations. During my work with nonprofits, I’ve found the most common mistake is not taking the time to fully understand the questions and instructions. This can result in responses that are not fully aligned with what the IRS is seeking or do not provide the most beneficial information to the public regarding your tax exempt organization and its operations.

In an effort to provide some clarity and assist management and those that prepare the form, the IRS has recently issued a summary of significant changes for the 2012 Form 990, as they do each year.   Exempt entities should be aware of these changes to understand how their filings may be affected.  Here are some of the most important changes and clarifications to the form:

Part VI – Governance, Management and Disclosure:

  • The IRS has provided clarity with regards to question 3 of Part VI, which asks if the organization delegated control over certain management duties to a management company.   If this question applies, then the entity must disclose certain information in Schedule O.  The disclosure should include the name of the management company or other person(s) performing the management duties, a description of the services performed, a list of any current or former officers, directors, trustees, key employees and highest compensated employees who were compensated by the management company as well as the total compensation received by those individuals from the management company.
  • If an organization has ever used a management company to manage part of their operations then they need to provide additional disclosures.

Part VII – Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees and Independent Contractors:

  • Section A, column (B) now requires the entity to report average hours worked for related entities by any individual listed in Section A.
  • The IRS has clarified that insurance providers should not be listed in Section B as independent contractors.

Part VIII – Statement of Revenue:

  • The IRS no longer requires the reporting of revenue passed through from joint ventures and other partnerships using amounts reported on Schedule K-1.  Beginning in 2012, the entity should report its share of revenue from such pass-through entities according to their books and records (please note that this reporting is also effective for reporting pass-through assets on Schedule X, the Balance Sheet). 
  • The IRS clarifies that if a 501(c)(3) is an S-corporation shareholder, all allocations of income should be treated as Unrelated Business Income.
  • The instructions note that if an entity has received Form 1099-K reporting a “gross amount” of payment card and third party network transactions, it should report these amounts in the same manner as if payments were not reported on a 1099-K.

Part IX – Statement of Functional Expenses:

  • Filers are now required to list the type and amount of each expense on line 11g (Other Fees for Service, Non-Employees) on Schedule O, if the amount on 11g exceeds 10% of total functional expenses. 

Part XI – Reconciliation of Net Assets:

  • The purpose of this section is to provide a schedule which reconciles changes in net assets for items not reported elsewhere on the Form 990.  Beginning in 2012, new lines are included for net unrealized gains (losses) on investments, donated services and use of facilities, investment expenses and prior period adjustments.  These items were formerly reported in a net asset rollforward on Schedule D, Part XI. 

Form 990, Schedule B, Schedule of Contributors:

  • The IRS has clarified that the entity should complete Schedule B using the same method of accounting that is disclosed on Form 990, Part XII, line 1 – Financial Statements and Reporting Section.

Form 990, Schedule K, Supplemental Information on Tax-Exempt Bonds:

  • The IRS has added questions in Part III – Private Business Use and Part IV – Arbitrage, regarding the following:
    • Whether the bond issue met the private security or payment test.
    • If there has been a disposition of any of the bond-financed property (to other than a governmental entity or 501(c)(3)) since the bonds were issued.  If so, additional inquires apply.
    • If entity has not filed Form 8038-T, Arbitrage Rebate, Yield reduction and Penalty in Lieu of Arbitrage Rebate with respect to bond issue, additional inquiries apply.

While these changes are what we consider the most significant, there are other changes throughout the forms and schedules.  As always, be sure to read all questions carefully and seek help from your tax advisor if you have any questions.    Click here for additional useful links.