IRS Releases New Draft Instructions to Form 990

By Heather Leggiero, CPA, J.D., The DR Group, Albany, NY

Editor: Kevin F. Reilly, J.D., CPA

The new Form 990, Return of Organization Exempt from Income Tax, was released in December 2007, and the first draft release of the instructions was issued in April 2008. The IRS has now released a second draft of these instructions. According to the IRS, the instructions will not significantly differ in content when they become final later in 2008. Because of the extensive overhaul of the form and consequently the instructions, the IRS wanted an accurate draft released early so exempt organizations and practitioners could prepare for the changes.

The new Form 990 will be required for the 2008 tax year, although some transitional relief is allowed for organizations with gross receipts under $1 million and total assets less than $2.5 million (for tax year 2009, relief is granted to those with gross receipts under $500,000 and total assets less than $1.25 million). These organizations can choose to file Form 990- EZ instead. The filing thresholds will be permanently set at less than $200,000 of gross receipts and less than $500,000 of total assets beginning with tax year 2010.

The revised instructions provide clarity in many aspects of the form, but especially in the definition of “key employee.” The instructions state that for purposes of reporting on Form 990, a key employee is an employee (other than an officer, director, or trustee) who meets all of the following requirements:

  1. $150,000 test: The employee receives reportable compensation from the organization and all related organizations in excess of $150,000 for the calendar year ending with or within the organization’s tax year;
  2. Responsibility test: The employee
    1. Has responsibilities, powers, or influence over the organization as a whole that are similar to those of officers, directors, or trustees;
    2. Manages a discrete segment or activity of the organization that represents 10% or more of the activities, assets, income, or expenses of the organization as compared with the organization as a whole; or
    3. Has or shares authority to control or determine 10% or more of the organization’s capital expenditures, operating budget, or compensation for employees.
  3. Top 20 test: The employee is one of the 20 employees (that satisfy the $150,000 test and the responsibility test) with the highest reportable compensation from the organization and related organizations for the calendar year ending with or within the organization’s tax year.
In addition, an individual who is not an employee of the organization (or of a disregarded entity of the organization) is still treated as a key employee if he or she serves as an officer or director of a disregarded entity of the organization and otherwise meets the definition of key employee.

Management companies and similar entities that are independent contractors are not considered key employees. However, their top management officials and top financial officials are considered officers and are reported as such.

Implicit within this definition is reportable compensation. This term needs to be understood to determine if the entity has key employees or which employees are key employees. The instructions define reportable compensation for officers and other employees as amounts required to be reported in Box 5 of Form W-2. This definition is different for directors and trustees, who also incorporate amounts reported on Form 1099-MISC, Box 7. For certain clergy and religious workers, reportable compensation is the amount reported on Form W-2, Box 1.

To determine the $150,000 test, compensation from all related organizations must be combined. The instructions define a related organization as one with a relationship to the filing organization as a parent, subsidiary, brother/sister, or supporting/ supported organization.

The instructions contain the following examples:

Example 1: T is a large Sec. 501(c)(3) university. L is the dean of T’s law school, which generates more than 10% of T’s revenue, including contributions from alumni and foundations. Although L does not have ultimate responsibility for managing the university as a whole, L meets the responsibility test and is thus reportable as a key employee of T.

Example 2: S chairs a small academic department in the college of arts and sciences of the same university T described in Example 1. As department chair, S supervises faculty in the department, approves the course curriculum, and oversees the operating budget for the department. The department represents less than 10% of T’s activities, assets, income, expenses, capital expenditures, operating budget, and employee compensation. Under these facts and circumstances, S does not meet the responsibility test and thus is not a key employee of T.

Example 3: U is a large acute-care Sec. 501(c)(3) hospital. U employs X as a radiologist. X gives instructions to staff about the radiology work X conducts, but X does not supervise other U employees, manage the radiology department, or have or share authority to control or determine 10% or more of U’s capital expenditures, operating budget, or employee compensation. Under these facts and circumstances, X does not meet the responsibility test and thus is not a key employee of U.

Example 4: W is a cardiologist and head of the cardiology department of the same hospital U described in Example 3. The cardiology department is a major source of patients admitted to U and consequently represents more than 10% of U’s income, as compared with U as a whole. As department head, W manages the cardiology department. Under these facts and circumstances, W meets the responsibility test and thus is a key employee of U.
The instructions also provide an extensive table illustrating how different types of compensation should be reported and in what sections of the form and schedules.

It is clear that the new Form 990 instructions are comprehensive. The new draft instructions also clarify reporting on transactions with interested persons (Schedule L) and the reporting in the governance, management, and disclosure section on the core form. There are also significant changes for many of the schedules, including Schedule H, Hospitals, and Schedule K, Tax-Exempt Bonds. 


Kevin F. Reilly, J.D., CPA, is a member of PKF Witt Mares in Fairfax, VA.

Unless otherwise noted, contributors are members of or associated with PKF North American Network.

For additional information about these items, contact Mr. Reilly at (703) 385-8809 or

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