Lawyers Thomas Chomicz and Elaine Waterhouse Wilson explain the new Form 990 and a few issues all groups should consider in reviewing their bookkeeping practices this year.
Thomas Chomicz & Elaine Waterhouse Wilson
So far the changes affect only those mid-size to large Section 501(c)(3) public charities that are required to file a Form 990. The changes do not affect private foundations, which are required to file the Form 990-PF.
For tax year 2008, the first filing using the new form, only groups with gross receipts over $1 million or assets over $2.5 million must use the new Form 990. Other groups can use the Form 990-EZ.
Groups with less than $25,000 in gross receipts can file the new Form 990-N, called the “e-postcard.”
The Form 990 threshold is lowering over time. By 2010, every organization with assets over $500,000 and gross receipts over $200,000 must use the new Form 990.
Motivations for the makeover
Before the revisions, the Form 990 was an eight-page log of financial information and some operational data. Now it’s a misnomer to say it’s a tax return; it has turned out to be more of an information return.
Because of the detailed information requested, this is going to end up being an organization’s annual report to constituents and contributors. As public information, any Guidestar subscriber can get a copy of it.
So nonprofits now should look at the Form 990 more as a public relations piece.
So what do I do?
You need to go through the major changes listed below and at least say, “We don’t have this policy for a valid business reason.” It won’t be adequate to say “We haven’t talked about it.”
You want to start putting those changes that do need to be made in place now, so you can report them next spring.
The IRS ‘hit list’
The following lists several areas everyone should consider, since they’re all on the IRS “hit list.”
Reporting compensation is not a new concept. On the old Form 990, the top five employees with salaries over $50,000 were required to report them.
What has happened over the last few years is that, especially in larger organizations, compensation packages are not limited to salaries. There’s a lot of other stuff going on not captured by the old form.
The new Form 990 gives more guidance as to how to treat other forms of compensation and the process for determining reasonable compensation using independent analysts and comparable data.
There are two main things to focus on this year: your compensation procedures and your expense reimbursement policies.
Compensation procedures. Basically, if you follow the procedures outlined in the code section that governs compensation (Code Section 4958), you will be entitled to a presumption that your compensation is legal.
The IRS has found that people are not following those procedures and would really like them to, even though they’re not mandatory.
Expense reimbursement policies. Expense reimbursement policies have gotten a lot of attention in the media: first-class travel for spouses, maids, housing allowances, discretionary spending accounts.
The new Form 990 asks: Do you have any of these? If you do, do you have policies in place so they’re not abused?
The IRS has no authority over a public charity’s governance, but the new Form 990 asks about governance anyway. The theory is that good governance is good operations and good compliance with tax policy, so they’re kind of coming in through the back door.
You can answer “no” on all of the governance questions, but what we’re hearing from the IRS informally is that’s going to raise your audit profile. It may be those types of things get you on the “recheck list” three to five years after you received your tax-exempt status.
Independent directors. The new Form 990 asks if an organization has independent directors. The tax laws don’t require organizations to have independent directors, except a specific few.
Unfortunately there’s not a clear definition on what an independent director constitutes. We would say that having an outside person instead of a family member or friend would be in compliance.
Conflict of interest policy. The new form asks if you have one and are complying with it.
Meeting documentation. All governing body meetings by any committee should be documented in written form.
Whistleblower policy. You must also have a written whistleblower policy.
If an employee thinks some transaction is inappropriate and brings it to the attention of the board of directors, he or she may be concerned about possible retaliation by supervisors. A whistleblower policy prohibits this retaliation.
Document retention and destruction policy. Finally, groups must have a written document retention and destruction policy which determines how long you keep your records.
These last two are actually required by federal law.
- Changes to Financial Information and the Public Support Test
The presumption is that a Section 501(c)(3) organization is a private foundation unless it can demonstrate that it is a public charity. Many public charities obtain that status by satisfying the public support test, which generally requires that at least one-third of the organization’s total support comes from contributions from the public.
The new Form 990 will eventually measure this test over a prior five-year period, instead of the four-year period previously used.
There are a few supplemental financial information “hot buttons” required by the new form: conservation easements, donor-advised funds, collections of art and historical treasures, etc.
It seeks a lot of extra financial information on endowments, as well, especially universities endowments.
The new 990 also touches on a couple sensitive issues for hospitals, such as moving towards a clearer definition of charity care and examining real estate tax exemption. There has also been some noise about what constitutes an exempt hospital, and these are the things the IRS is going to start tracking in that regard.
Elaine Waterhouse Wilson has compiled a more detailed run-through of new Form 990 changes on Quarles & Brady’s website.
Thomas Chomicz and Elaine Waterhouse Wilson are partners in Quarles & Brady’s Tax-Exempt Organizations practice in Chicago.