Not Just Numbers: How Tax Form 990 Can Tell An Organization's Story
May 16, 2014
This week, hundreds of thousands of nonprofits whose fiscal years ended in December filed a Tax Form 990, the annual return required of many tax-exempt organizations. While the full 990 is required for tax-exempt organizations with average annual receipts of over $200,000 (organizations with receipts between $50,000 and $200,000 file a simpler 990EZ, and those with receipts under $50,000 file a 990N or “Postcard 990”), an increasing number of funders are requiring that all of their grantees provide a full 990.
It can be easy for organizations to see this form as an administrative hurdle, an expensive chore that, once it is completed, is filed and forgotten. In reality, an organization’s 990 can be its first impression to thousands of funders, donors and rating organizations. As such, it’s important to understand its importance and how the 990 tells a story.
Tax Form 990 is a publicly-available report to the IRS on an organization’s structure and activity. Funders use it to evaluate prospective grant recipients or partners. Donors use it as tool to help decide the most effective destinations for their charitable dollars. For charity rating services such as Guidestar and Charity Navigator, it is one of the principle data sources used to create a picture of an organization. In a world where anyone can access 990s online, it is vital that organizations understand the story their 990 is telling.
For example, program officers at the California Community Foundation cite many different narratives within the 990 that drive their review, such as:
- What is the major source of revenue? How do expenses compare to revenue over time?
- What are the organization’s total expenses? What percentage goes to staff and officer compensation?
- How much debt does the organization have outstanding? Is it above 10 percent of annual operating costs?
- Is the organization in good standing with the IRS?
- Does the organization have necessary checks and balances, including policies regarding conflicts of interest and relationships between board and staff?
- Has the organization participated in transactions with interested parties?
This article focuses on a few key questions that a 990 can answer about an organization: who is the organization, what does it do, and how well does it operate?
1. Who is the organization?
Tax Exempt Status
The opening page of a 990 can be used to confirm that the organization is a 501(c)(3) public charity, and if it is a corporation, trust, or association.
Schedule A Part I provides further justification for the 501(c)(3) classification. This information can be especially meaningful to private foundations or donor-advised fund managers, as IRS regulations may affect their giving to certain types of 501(c)(3) organizations.
990 Form Part I also summarizes an organization’s financials, comparing them against the previous year. Did grants, salaries, or fundraising expenses drastically change? Through this section, readers can identify areas which warrant further analysis using the more detailed sections and schedules follow.
2. What does the organization do?
Part III allows the organization to describe its mission and accomplishments. In Parts IV-VI, the organization attests to its activities and policies through a series of questions. Does it have donor-advised funds, engage in lobbying, or operate in locations outside the United States? Does it maintain a board of directors and a conflict of interest policy and bylaws? These answers can illuminate the governance, structure and business of the organization.
3. How well does the organization operate?
Revenue vs. Expenses
Part VIII details the organization’s revenue, allowing a reader to understand if income is primarily derived from federal grants, membership dues, fundraising, or general public support. Schedule A Part II additionally supports the organization’s status as a publicly supported organization and offers insight into how revenue has grown or declined over time.
Part IX highlights an organization’s expenditures. A common calculation used by rating services such as Guidestar and Charity Navigator, along with many others, is the percentage of expenses spent on programmatic activities vs. non-programmatic expenses, such as fundraising or operational costs.
All of these sections can help funders, donors, rating services and others to identify areas of further interest, leading them to additional sections and schedules detailing grants, contributions, lobbying, fundraising activity, or compensation.
While the 990 can’t tell the whole story of any nonprofit, the diverse narratives it contains provide valuable information on the organization’s finances, structure, and activity. Increased access and the popularity of online rating services mean that donors and funders are using it more than ever to guide their decisions. By increasing their understanding of what the form says and how it is used, nonprofits can better understand of the story that their 990 tells about them.
What does your 990 say about your organization? How do you use the 990 to guide your giving, funding or partnership decisions? How do you use it to tell your story?
For additional information on reading and preparing 990s, please see the links below:
Guidestar: Highlights of IRS Form 990
Nonprofit Coordinating Committee of New York: How to Read the IRS Form 990 & Find Out What it Means
Foundation Center: Diagram of Form 990
Emily Zietlow is the Grants and Funds Operations Manager at the California Community Foundation.
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