Speed-reading Form 990 For Lawyers Howard Donkin, CPA Jacobson Jarvis CPA’s November 2, 2017 Seattle, Washington
Howard Donkin, CPA, Jacobson Jarvis 20 years’ experience helping not-for-profits clients with federal tax-related issues, including revoked exemption, UBIT, compliance and penalty abatement Served on not-for-profit committees for the WSCPA, AICPA, WA Sec of State, Charity Advisory Committee and Tax Analyst Review Board Volunteer leadership with the Rotary Grants Committee, Bellevue Botanical Garden Foundation & Bellevue Arts Commission
4 reasons you should care about what your Form 990 says about your organization IRS Audit Governance ü Time consuming ü Exempt purpose (Mission) ü Board independence ü Penalties ü Revoke exempt status ü Policies and procedures Monitoring Marketing to Donors ü Process is like a financial audit (and more) ü Accomplishments (60 families served) ü Suggests best practices (rebuttable rules) ü Volunteers (295 people & 900 hours) ü Are you maintaining your exempt status? ü Areas served (King & Pierce counties)
Your determination letter is a good place to start to find out if your organization needs to file a 990 This section is the most important source of information on the determination letter.
Depending on your gross receipts and assets, there are several different Form 990s available If organization has gross receipts of $50,000 or less, it files Form 990-N • Electronic Notice (e-postcard) Also, larger “small” organizations can file the simpler Form 990-EZ if gross • receipts are between $50,000 and $200,000 and if assets are less than $500,000. Larger organizations file the full Form 990 • Your return is due 4 ½ months after your year-end. Extension possible to 10 ½ months.
If you have revenues unrelated to your organization’s exempt purpose, you may also need to file a 990-T • Organizations with $1,000 or more of gross unrelated business income must file a Form 990-T • Organizations frequently overlook UBTI sources such as: • Advertising • Parking fees • Subleased space • UBTI is reported on page 1 and page 5 of new 990 • IRS is looking for continuing losses that are unreasonable in a business setting, or due to the over-allocation of expenses • Applies to 990, 990-EZ and 990-N filers
You can improve your ability to speed-read a Form 990 by starting with four key pages Snap Shot – Page 1 Accomplishments – Page 2 Mission, new programs, three largest Basic information, summary of activities, governance, revenue, expenses , assets, programs, number of patients served, expenses , grants & revenue by program. liabilities and nets assets. Checklist of Required Schedules – Page 3 Governance, Mgmt & Disclosure – Page 6 Did you file a complete and accurate Board independence return? Most charities have Written policies contributors, fundraising, grants, non- cash gifts and other disclosures. Governance documents made available
Next, review your compliance requirements … ü Jeopardizing exemption (political activity/personal benefit) ü Substantiation of contributions ($75/$250) ü Public disclosure (1023, 990, 990-T) ü Filing & extension due dates ($20/$10,000)($100/$50K) ü Recordkeeping (what & how long?) ü Compliance tests (public support %) Page 5 of the 990 has filing and tax compliance information
… and whether you pass the IRS tests for maintaining tax exempt status Proper Organization Nondiscrimination Do your Articles state your exempt Do you have a racially nondiscrimination purpose and operation/termination policy towards students in your governing requirements? Have you updated documents, brochures, etc? (Schedule E) changes? Commerciality Community Benefit Do you operate more like a commercial What is your program expense %? business than a charity, with direct Do you serve the public and not private counterparts, retail pricing, advertising, interests? business hours, no volunteers and no contributions? Are your programs real and substantial?
Recognizing red flags ahead of time can limit your exposure to a potential IRS audit Incomplete Return Accomplishments Basic information missing, return not Missing three largest programs, program signed, no board roster and/or no expenses , grants & revenue by program. fundraising expenses listed. Checklist of Required Schedules Governance, Mgmt & Disclosure Completed checklist but did not complete For example: required schedules for contributors, • No independent board members fundraising, grants, non-cash gifts and other • No written policies disclosure. • ED salary is 51% of all expenses
There are three main criteria for determining a board member’s independent status ü Not an employee of the organization, or of a related organization ü Not an independent contractor receiving over $10,000 ü Not involved in a transaction reportable on Schedule L ( i.e. , an interested party)
Relying on a checklist is another good way to avoid an IRS audit q A complete and accurate tax return q Your programs are consistent with your mission q You follow the rules for gift substantiation (75/250) q No political activity, and only insubstantial lobbying q You have written policies and follow them q Monitor board independence (questionnaire) q Monitor compliance tests
Finally, you may include a review of state and local tax filings Sales Tax & Sports Organizations ü Recent Excise Tax Advisory on fees charges for amusement and recreation services says youth orgs will remain exempt but adult program should pay B&O tax and collect sales tax on participation fees. Example, volleyball or soccer leagues. Employment Taxes ü IRS Voluntary Worker Classification Settlement Program could be a big savings. If an IRS or ES audit determines that your independent contractors are employees, then you might be subject to back taxes, penalties and interest. Voluntarily comply now and it will cost you only about a 10% tax. Property Taxes ü Not-for-profits must pay property tax unless they file and receive an exemption from the Washington State Department of Revenue and they do not violate restrictions on property use for exempt purpose.
In summary, remember to stay educated, informed and proactive when speed-reading financial statements Educate yourself on reporting and compliance requirements • Look for red flags • Use a review checklist • Make reasonable inquiries and exercise independent judgment • Make recommendations for process improvements, as needed • • E d u c a t
Howard Donkin, CPA howard@jjco.com 206-812-5484
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