This is part 3 in a guest series of posts on Nonprofit financial management from Cindy Lauren of Lauren Associates – non profit consulting.
Part 1: The Basics: Why is there a NonProfit Tax Status?
Part 2: Basic Legal / Financial Boundaries for a Nonprofit
As with many things in life, we know we have to do them and we have to do them right and on time; filing tax returns ranks fairly high in this arena for many. In my own experience I have found that by finding some history or some context, these chores become a little more understandable and therefore less onerous. As a nonprofit leader, it was my responsibility to provide the information to the accountant each year, the reconciled bank statements, the supporting documents for purchases, loans, payouts, payroll and more.
Honestly, I felt as if my accountant had added a layer of Teflon ( though not un-understandably) by having me sign a letter taking responsibility for the data delivered, even if I had no idea how the numbers got crunched into a tax return. I thought if I learned a little more about the whole shooting match, preparing for it, planning my operations with it in mind, things might be a little easier. This is what I learned:
The 990: A clear understanding
The IRS form 990 is a report that must be filed each year with the Internal Revenue Service by organizations exempt from Federal income taxes under section 501 of the Internal Revenue Code, and whose annual receipts are generally more than $25,000 a year. There are many subsections for the 501 section of the tax code, for this article, we are addressing 501 c 3’s. It is an information return and not an income tax return since the organizations that file it do not pay income taxes; however external activities that the organization may engage in, such as selling merchandise, may incur local state sales taxes. (hey, great, another schedule!)
Timing is Everything:
Please click this link to see the IRS schedule for 990 due dates. These due dates depend on the organization’s fiscal year close. As there are no taxes, there are no financial penalties, but missing deadlines with the IRS is never a good option. Not filing for three consecutive years will result in an automatic suspension of the tax-exempt status. Addressing this as soon as possible is often the best policy.
There are two principle purposes for the 990 and its enhanced transparency (read: additional reports and schedules) :
- It provides information to government and state agencies (the IRS and state charity regulators) about the financial activities of that year for the organization. That information can determine if the organization is indeed using its funds within the laws that govern nonprofit work.
For instance, political lobbying is prohibited for organizations with this designation.
- The 990 provides a great deal of detail financial information about the organization’s financial condition, about its financial strength or weakness and about such things as the sources of its income. A caveat here is that any ‘moment in time’ financially is not reflective of it activities, trends and other impacts on finances. As a rule of thumb, a 3-5 year overview is more meaningful.
For the most part, the ‘newer 990’ continues to be a reporting document, although with a very important shift . Initially the 990 was primarily the focus of the IRS and state agencies and sometimes larger donors. Now the intended audience now also includes the general public and, more specifically, donors. The format has been thoroughly revised to present, up front, information mostly likely to be of greatest interest to potential donors: organizational mission, governance, and comparative financials. It must be expected that when these reports are posted for public view.
As the availability and access to this information is mandated, assuring the accuracy of the information is critical. The Teflon of my accountant is well warranted, it is the organization that is revealing so much of itself, and you sure want it to look good.
Cindy Lauren is the Principal at Lauren Associates – non profit consulting
As well as advising Executives and Boards on all aspects of nonprofit management, the firm specializes in developing fundraising solutions for all sizes of organizations.
Image Credit: File:I-990.svg on Wikipedia