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November 3, 2017

Tips to Understanding an IRS Form 990

by Anne Paddock

Most charitable organizations exempt from income tax under Section 501 are required to file an IRS Form 990, which details financial, management, program, and fundraising information.  These returns can often be hundreds of pages long which can be overwhelming to potential donors who are trying to understand where charitable dollars are spent. Although all of the information is important, there are key pieces of information to focus on if time is limited. With that in mind, here are 13 tips to gain a quick understanding of a non-profit.

Tip 1:  The front page referred to as Part I (Summary) gives a good overview.

  • Part I, Line 5 provides the total number of employees.
  • Part I, Line 12 provides the total revenue for the current and past year.
  • Part I, Line 13 provides the total amount awarded in grants (and this is important for organizations that act as a conduit to other charitable organizations like United Way).
  • Part I, Line 18 provides the total amount of expenses.
  • Part I, Line 19 tells the reader how much of revenue was not spent (revenue less expenses).
  • Part I, Line 20 provides the total amount of assets. Line 21 provides the total liabilities and line 22 provides the net fund assets (think savings account).

Tip 2: Part VII addresses compensation.

  • Section A, Section 1a addresses compensation of officers, directors, trustees, key employees, the most highly compensated employees of the organization (and any related organizations), and independent contractors. Sometimes there is not enough space and there will be a note to refer to an attachment or more detailed information at the end of the tax return.
  • Section A, Part 1d provides the total figures for this group of people.
  • Section A, Part 2 provides the total number of individuals who received more than $100,000 in compensation.
  • Section A, Part 4 asks if any individual received more than $150,000 in total compensation.  If the answer is yes, the organization is required to complete Schedule J which provides more detail.
  • Section B, Part 1 provides a list of the five highest compensated independent contractors that received more than $100,000 in compensation.
  • Section B, Part 2 tells the reader how many independent contractors received more than $100,000 in compensation.

Tip 3:  Part VIII is the Statement of Revenue and provides detailed information where revenue came from (campaigns, fundraising events, contributions, gifts, grants, investment income, rent, sales, etc). This is the section where readers can find out whether the organization relies on contributions, government grants, private grants, investment income, and whether contributions were cash or non-cash or a combination.

Tip 4:  Part IX is the Statement of Functional Expenses. This section is probably the single most important section of the tax return because readers learn where revenue was spent.  Expenses are broken out into 4 categories here:  Program, Management, Fundraising, and a Total but it is important to break out “grants” because this number really needs to be viewed separately. If an organization’s primary purpose is to provide grants to other organizations (i.e. United Way, ALS Association, American Heart Association, etc), then the reader wants to know what percentage of revenue was allocated to grants. Of course, part of making grants is reviewing grant requests (a program expense) and, yet often it all comes back to how much revenue was given in grants.

Tip 5:  Part X is the Balance Sheet which is basically what they own and how much they owe. In this section, the reader will learn the total assets held by the organization, it’s liabilities, and its net fund balance. In addition, the makeup of the assets is very important (is the organization liquid with most assets in cash or marketable securities or are their assets concentrated in real estate?).  Liabilities are also extremely important (is the organization’s biggest liability to its employees in the form of benefits/pensions payable or is it to their intended population in the form of grants payable?). The amount and scope of liabilities is very important in considering the financial health of an organization.

Tip 6:  Look at Part XI which is a reconciliation between the tax return numbers and the financial statements. Focus on the adjustments and specifically whether the organization had net unrealized losses on investments (in other words, losses that have not been realized – stock in their portfolio whose value has fallen below the purchase price). Sometimes these unrealized losses run into the millions and millions of dollars.

Tip 7:  Look at Schedule D:  Supplemental Financial Statements. There is a lot of information in this schedule related to donor advised funds, types of assets, endowments, land, building, and equipment (i.e. is the organization cash rich or real estate rich?), types of investments, more detail on “other liabilities,” and a reconciliation between the financial information on the tax return and the audited financial statements, and supplemental information on specific assets and liabilities.

Tip 8:  Look at Schedule F to see what kinds of activities the organization engages in outside the US. Specifically, focus on the grants given to other organizations and investments the organization has overseas.

Tip 9:  Look at Schedule G to learn about fundraising or gaming activities.  This section will tell you what types of fundraising the organization engages in (i.e. mail, internet, phone, events, and/or in-person solicitation). Look specifically at Part 1, Section 2b where the 10 highest paid fundraisers are listed with how much they raised and how much they were paid for raising those funds. This information is really important because there are many fundraisers that keep a very high percentage of what they raise. Also look at Part 2 for detail on fundraising events.  Here you can find out how much the organization spent on entertainment, prizes, food and beverages, facility costs and more.

Tip 10:  Look at Schedule I to know how much and who received grants (greater than $5,000) from the organization. This list is very important because all too often a charitable organization will raise money (i.e. United Way) and give a grant to another United Way (who deducts their overhead costs) diluting revenue even further because another set of overhead expenses are deducted). Charitable dollars often go much further if given directly to an organization rather than an organization that gives grants because donors bypass some overhead costs.

Tip 11:  Read Schedule J:  Compensation Information.

  • Under Part I, Section 1a is where you will find out if the organization uses first class or charter travel, pays for companion travel, provides discretionary spending accounts, gives housing allowances or a residence for personal use (i.e. Salvation Army), payments of business use for personal residence, health or social club dues, personal services (i.e. maid, chauffeur, chef), and more.
  • Part II provides a comprehensive list of the most highly compensated employees while Part III provides supplemental information (relationships, etc).

Tip 12:  Read Schedule M to learn about non-cash contributions. Many organizations take cars, boats, and other assets but quickly dispose of these items by selling them through a broker who is compensated for the sale (Part II).  This section also details the types of non-cash contributions (i.e. food, drugs, etc).

Tip 13:  Read Schedule O – Supplemental Information. This section provides explanations and is primarily a narrative but one in which key pieces of information on the organization are disclosed. Read these explanations because often a vital piece of information is provided here.

The IRS Form 990 is often cumbersome and lengthy (many are more than 100 pages in length) so if you don’t have the time to review the entire 990, focus on key sections to learn about the organization.

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