As you probably know, the Form 990 is the information return that most large tax exempt organizations file with the IRS each year. There are variations such as the Form 990-PF for private foundations; the short form, 990-EZ for mid-size organizations; and the Form 990-N e-Postcard for smaller organizations.
This article uses terms like Form 990-series return for the Forms 990, 990-EZ, 990-N e-Postcard, and the Form 990-PF. However, when we say Form 990, we’re talking specifically about the Form 990 that must be filed by charitable organizations to be entitled to certain exempt organization tax benefits.
What is Form 990?
Unlike most IRS forms, Form 990-series returns are not tax forms. Their primary purpose is not to report financial information. Instead, the forms provide the IRS and the public with information about an organization’s programs, activities, relationships, transactions and governance, in addition to revenues, expenses and assets.
How do exempt organizations use form 990?
The IRS uses Form 990 returns to administer the tax laws and to ensure that exempt organizations abide by those laws. And because Form 990 is a publicly disclosable document, it’s also the public’s window into an organization’s operations. A properly completed and filed Form 990-series return will meet the filing obligations of the organization and show the IRS and the public that the organization is organized and operated as a tax-exempt entity – that it is in compliance with applicable tax laws; that it’s well governed and managed; that it furthers its mission through its exempt activities; and that it provides valuable services to the public.
Who Must File Form 990?
As you already know, certain types of organizations don’t have to file a Form 990-series return. These include churches, associations of churches, and integrated auxiliaries of churches. I repeat churches do not have to file the Form 990, 990-EZ or 990-N. However, they must file 990-T to report unrelated business income if they have more than $1,000 of gross unrelated business income in any taxable year.
There are also a few other exceptions to filing Form 990, mostly for governmental entities and political organizations. If you’re interested, Publication 557, Tax-exempt Status of Your Organization and the Form 990 and 990-EZ instructions list all of the exceptions.
New Organizations and Form 990
Newly formed organizations that don’t meet any of these exceptions are required to file a Form 990-series return, even if they haven’t yet applied for or received recognition of exemption from the IRS. It’s not enough that the organization claims to be exempt from taxation. You may be required to file a Form 990-series return.
If an organization has filed, or plans to file a Form 1023, but is not yet recognized by the IRS as tax exempt, then it should check the “application pending” box on page one of the Form 990 or Form 990-EZ.
501(c)(3) and Form 990
The annual information return an organization is required to file is determined by either its public charity status or its financial activity. For example, if an organization is exempt under 501(c)(3) and classified as a private foundation, it will file the Form 990-PF.
If a 501(c)(3) meets a public support test over a five-year period, it will qualify as public charity rather than private foundation, so it will complete one of the other Form 990- series returns, not the PF. If a 501(c)(3) organization doesn’t know whether it meets the public support test, then it should fill out Form 990, Schedule A, before going any further. In general, it meets the test if it has many contributors and/or other sources of support.
Form 990-EZ and the Form 990-N
Form 990-EZ is the annual information return that most mid-sized taxexempt organizations may file instead of the Form 990. The Form 990-EZ is kind of like the little cousin of the Form 990.
Form 990-N, the e-Postcard, is the newest member of the Form 990-series and it comes to us courtesy of the Pension Protection Act of 2006.
You’ll save a lot of time and aggravation if you delegate preparation of sections of the Form 990 to those with specific knowledge about the organization’s operations that a particular part of the form is asking about.
Filing Form 990
Before you file your Form 990, if you’re doing this in paper, you’ll want to assemble the package of forms and schedules and attachments in the following order. You’ll put the core form with all parts completed, parts one through 12 that will go first. Then the schedules that you completed as applicable – and you’ll file those in alphabetical order. Then you’ll attach any attachments that you’ve completed.
Many have asked why these schedules are necessary. The IRS believes that there’s a close link between good governance and tax compliance. Organizations that adopt and implement sound risk management policies greatly improve their ability to be tax compliant. Conversely, most violations of tax-exempt law that we have seen in examinations have resulted, in part, from failure to exercise good governance.
Unrelated business income, or UBI for Non-Profits
Organizations may have to report and pay tax on UBI. If UBI activities become a substantial part of an organization’s activities, it might jeopardize the organization’s exempt status.
So what is UBI? Well, there’s a three-part test. It is income from a trade or business that is regularly carried on and not substantially related to the organization’s exempt purpose. The first part of the test is that the activity must be a trade or business. An activity does not lose its identity as a trade or business merely because it is carried on within a larger group of similar activities that may be related to the organization’s exempt purpose.
For example, the regular sale of pharmaceutical supplies to the general public by a hospital pharmacy is a trade or business. However, sales to the hospital and patients are related, and therefore, not UBI. Likewise, a hospital cafeteria operated for the convenience of the hospital’s employees, patients, and the patients’ visitors is a related activity and also not UBI.
Business Activity of an Exempt Organization
The second part of the test is that the trade or business must be regularly carried on. A business activity of an exempt organization is generally considered to be regularly carried on if it shows a frequency and continuity that is conducted in a way generally similar to comparable businesses of non-exempt organizations. For example, a hospital auxiliary’s operation of a sandwich stand for a week at a state fair would likely not be regular conduct of a trade or business; however, operation of the sandwich stand daily at the hospital and open to the public would be considered regular conduct of a trade or business.