Return of Organization Exempt from Income Tax Overview

What Is Form 990: Return of Organization Exempt From Income Tax?

Even organizations that are exempt from paying federal income tax have to report their activities annually to the Internal Revenue Service (IRS). This requirement by the IRS is detailed in the Internal Revenue Code (IRC). Some tax-exempt organizations are required to use Form 990: Return of Organization Exempt From Income Tax for their annual reporting.

Organizations that use Form 990 are exempt under the tax categories that are outlined in Section 501(c), Section 527, and Section 4947(a) of the IRC. These organizations are typically classified by the IRS as charitable organizations, political organizations, or nonexempt charitable trusts. Private foundations are not required to file Form 990 because they have their own annual filing requirement: Form 990-PF.

Form 990 must be filed by an exempt organization, even if it has not yet filed Form 1023 with the IRS to receive official approval of its tax-exempt status. However, there are certain organizations that are exempt from filing the form. Unlike income tax returns that are private, this form is open to public inspection.

How to Read Form 990: Return of Organization Exempt From Income Tax

Form 990 is intended to provide the government and interested members of the public with a snapshot of the organization’s activities for that year. It’s possible that some donors may base their gifting decisions on what they can discern from Form 990. The IRS requires an extensive amount of information from the organization; the instructions for how to complete the 12-page form are 100 pages in length. Additionally, the organization can be subject to a large penalty if it does not file on time.

Form 990 consists of 12 different parts:

• Part I is a summary of the organization. It requires information about the activities and governance of the organization (e.g., its mission, number of employees and volunteers, etc.), its revenue, its expenses, and its net assets or fund balances.
• Part II is the signature block where an officer of the organization attests under penalty of perjury that the information is true, correct, and complete to the best of their knowledge.
• Part III is a statement of the organization’s accomplishments, including its mission statement and the expenses and revenues for the organization’s three largest program services.
• Part IV is a checklist of schedules that must be completed and accompany the form (explained later).
• Part V is for statements about other IRS filings and tax compliance. For example, if the organization can receive tax-deductible contributions, it must indicate whether it has provided donors with the required substantiation for their donations.
• Part VI asks for information about the governing body and management of the organization as well as its policies.
• Part VII lists the compensation paid to current and former officers, directors, trustees, key employees, employees receiving more than $100,000 in compensation, and up to five independent contractors receiving more than $100,000 in payment from the organization.
• Part VIII is a statement of the organization’s revenue from related or exempt funds and unrelated business income, which requires the filing of Form 990-T; this income is not exempt.
• Part IX is for reporting the organization’s expenses.
• Part X is the organization’s balance sheet.
• Part XI is a reconciliation of the net assets of the organization.
• Part XII explains the organization’s financial statements and reporting (e.g., whether it uses the cash, accrual, or another method of reporting to prepare the form and whether its financial statements were compiled and reviewed by an independent accountant).

In addition to the form, the organization may be required to attach various schedules–A through O and R–to the form in order to provide supplemental information. The organization can determine the schedules they are required to use based on answers to questions throughout the form. One of the most commonly used schedules that organizations use to provide supplemental information to Form 990 is Schedule O.

All pages of Form 990 are available on the IRS website.

Special Considerations When Filing Form 990: Return of Organization Exempt From Income Tax

Instead of completing Form 990, an organization may be eligible to complete a simplified version of Form 990, called Form 990-EZ: Short Form Return of Organization Exempt from Income Tax. This is a four-page form, rather than a 12-page form, and requires some of the same information as Form 990. It can be used by an organization with gross receipts of less than $200,000 and total assets of less than $500,000 at the end of its tax year. Like Form 990, Form 990-EZ is also made public.

The Bottom Line

Because organizations that are required to file Form 990 are tax-exempt, their yearly activities may be subject to more scrutiny by the IRS. Form 990 allows an organization to completely disclose all of its activities every year. Because of the sheer amount of information the form requires, it will likely necessitate the assistance of a tax professional well-versed in tax law.