Editor: Annette B. Smith, CPA
The redesigned Form 990, Return of Organization Exempt from Income Tax, has been the subject of much discussion since the IRS released it in 2007. As the exempt sector and practitioners have been adjusting to the new filing requirements, areas of confusion have been identified. Earlier this year, an IRS official reported filing errors in approximately 1% of redesigned Forms 990 filed electronically during 2010. Common errors include failure to file Schedule O, Supplemental Information to Form 990, and failure to complete required lobbying details when a Sec. 501(h) election has been made.
These examples suggest a narrow definition of error and do not capture many of the issues practitioners and exempt organizations face when completing Form 990. This item highlights issues frequently encountered by practitioners, including many compensation issues. The comprehensive nature of the types of compensation required to be reported, the complicated and unique nature of many compensation packages, and the common practice of sharing employees among affiliated organizations generate numerous questions regarding who must be listed and on which organization’s Form 990, what compensation must be reported, and when and where such compensation is to be reported.
Eight Common Reporting Issues on Form 990
Identifying the president as both an officer and a key employee: When identifying an individual’s position in Section A, column C of Part VII, Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees, the titles of officer, key employee, highest compensated employee, and former are mutually exclusive; only one of these four should be chosen. The Form 990 instructions indicate that these positions are mutually exclusive. For example, a key employee is defined as “other than an officer, director or trustee”; highest compensated employees are “not also officers, directors, trustees, or key employees” (Form 990 instructions, p. 25). For a former officer, director, trustee, key employee, or highest compensated employee included on Form 990, only the “former” box should be checked, and the individual’s previous title should be used in column A with “former” added (e.g., former president).
Reporting only salaries as compensation expense: Reporting compensation of current officers, directors, trustees, and key employees on line 5 of Part IX, Statement of Functional Expenses, should include all forms of salary and benefits, including pension plan contributions, dental or medical insurance, and other employee benefits (whether or not taxable to the employee), not just wages.
Improperly reporting compensation reported in a prior Form 990: Schedule J, Part II, Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees, column F, was included in the redesigned Form 990 to alleviate concerns that deferred revenue amounts earned in one year but paid in a following year would be reported twice in total compensation, thereby overstating an individual’s total compensation over the period. Column F should represent the total compensation included in an individual’s current W-2 that previously was reported on a Form 990 as deferred compensation. In practice, the column’s heading, “Compensation reported in a prior Form 990,” confuses many preparers, who think they should report total compensation from the prior year’s Form 990 or the portion of the fiscal-year compensation expense that was not in the calendar year.
Failing to include the annual actuarial increase of defined benefit plans: Part VII and Schedule J reporting for deferred compensation should include any annual increase in actuarial value of a defined benefit plan (not accrued earnings on a defined contribution plan). Many large organizations receive an estimate of the value of this actuarial increase from outside compensation consultants, while other organizations need to determine their own reasonable estimate. The Form 990 instructions imply that any actuarial decrease would not be reported.
Reporting only unrestricted income: Form 990 should include all items of income and expense, whether unrestricted, temporarily restricted, or permanently restricted. Organizations that use net asset reporting for their financial statements often report income and expenses on Form 990 that show a complete picture of unrestricted net income, but may not include temporarily or permanently restricted items until the year in which amounts are released from restriction. In addition to other problems, this treatment could result in a misstatement of contribution income, because restricted contributions are not recognized in the year they are received. Misstating contribution revenue creates problems throughout the return, including proper reporting on Schedule B, Schedule of Contributors, and proper calculation of public support on Schedule A, Public Charity Status and Public Support.
Reporting support payments to a related organization as “other expense”: A payment made to another charitable organization, related or not, with the intent of supporting the organization’s charitable mission is a grant and should be properly reported as such. For example, if Charity A pays all the operating expense of related Charity B and receives no benefit in return, the total of these operating expenses should be identified as a grant expense on A’s Form 990.
Misidentifying the proper interested person: Schedule L, Part IV, Business Transactions Involving Interested Persons, column A, requires the preparer to identify the name of the interested person. In a business transaction between the filing organization and ABC, Inc., which must be identified because both the filing organization and ABC share a common board member, the name in column A should be “ABC, Inc.”
Advice varies on the level of specificity needed to report this type of transaction in column B, Relationship Between Interested Person and the Organization. Some practitioners are comfortable with a broad response such as, “The filing organization and ABC, Inc. share a common board member.” Others believe more specificity is needed and would identify the common board member by name.
Showing details of related transactions with a 501(c)(3) parent organization: Not all transactions between related entities need to be detailed on Schedule R, Part V, line 2. Transactions with Sec. 512(b)(13) controlled entities must be reported if the amounts meet the criteria in the instructions. Transactions with other Sec. 501(c)(3) entities do not need to be reported.
Noticeably absent from this list are governance and insider transaction issues that initially received a great deal of focus in public discussions about the redesigned Form 990. Although these areas receive extensive attention from an organization’s officers, directors, and trustees and require complicated coordination between multiple stakeholders, they tend to involve discussions about the formation, maintenance, and implementation of policies, and it is relatively straightforward to report whether these policies are in place.
Also absent from the list are items dealing with hospitals and tax-exempt bonds. The relatively small number of completed Schedules H, Hospitals, and Schedules K, Supplemental Information on Tax-Exempt Bonds, and the ongoing development of reporting in these areas make common reporting issues difficult to identify at this point. Each of these schedules contains detailed reporting requirements that present significant information gathering and reporting challenges for organizations required to complete them.
While many of the issues above may resolve themselves with time and experience, additional IRS clarification on the form and instructions in targeted areas would help reduce confusion.
Annette Smith is a partner with PricewaterhouseCoopers LLP, Washington National Tax Services, in Washington, DC.
For additional information about these items, contact Ms. Smith at (202) 414-1048 or email@example.com.
Unless otherwise noted, contributors are members of or associated with PricewaterhouseCoopers LLP.