At our last Social Impact Advisory Group round-table discussion held at Thrive Alliance, Karen Hahn of Karen A. Hahn CPA shared her perspective on why the IRS Form 990 matters many to nonprofit stakeholders so nonprofits should take heed. To emphasize that fact, Fairlight Advisors asked Karen to guest blog her Top Ten essentials to completing a powerful Form 990.
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Here is a fun fact, the Internal Revenue Service’s estimate of time needed to prepare a Form 990 is 85 hours, (see page 51 of the 103-page instruction booklet).
The form 990 is available for public inspection.The main source for viewing the return is on GuideStar.org but can also be found at the IRS website and for California, at the Registration of Charitable Trusts. This means that current and potential donors have the ability to examine the returns. There is a wealth of information to be obtained from the analysis of the return. But that analysis is only as good as the accuracy of the return and the care that has been taken in the preparation of the return. Donors are interested in the management of the non-profit, what percentage of contributions are being used for the program or mission of the organization, how many volunteers are participating in the program, and what fundraising efforts are being made. To demonstrate how a seemingly simple mistake could lead to significant consequences for a nonprofit, consider the example below, which describes a common error on the Form 990.
General and Administrative (G&A) cost is shown as 65.2% of a nonprofit’s gross receipts. A donor asks, “Why is this so high?” After investigation of the numbers reported on the return, it is found that the expenses of the non-profit were not reported on the correct lines. After recasting the numbers, it is found that the G&A expenses are really just 12% of gross receipts. When the nonprofit is able to correct this mistake, it was able to receive $15,000 in donations.
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Here are ten things to focus on when preparing the Form 990.
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It starts with a well thought out statement of mission for the organization.
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The next step is to break the mission into program initiatives, this may be just one program or several programs. (Schedule III of the return asks for a description of the top three programs and the associated revenue and expenses.)
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Prepare a complete and accurate set of books which classifies program expenses, G&A expenses and fundraising expenses.
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To do this, assumptions must be formulated on how to split certain expenses into these three categories, for example, how will the executive director’s salary and benefits be split or how will items such as rent, office expense, etc. be split among the three categories.
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Sponsor a Form 990 workshop to help key people in your organization understand the benefits of Form 990, what goes into the preparation of the form and how to read the form.
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Prepare a comprehensive list of board members, their titles, and hours contributed as well as salaries. (Schedule VII)
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Prepare a comprehensive list of volunteers and their hours.
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Prepare a comprehensive list of in-kind goods and services donated. Back this up with documentation of how the fair market values were arrived at.
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Consider consulting a professional before filing your return.
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The board should review the return before filing (It’s a requirement!). Develop a 990-review checklist.
View the Form 990 form as one component in your total marketing program. It is an expression of your mission statement and a vehicle for telling your stakeholders what your organization is trying to achieve and the results of that effort.
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All written content is for information purposes only. Opinions expressed herein are solely those of Fairlight, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.
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