Survey Reveals 60% of Charities Face Long Term Instability

If there is one word that summarizes the impact of COVID-19 on Illinois businesses, nonprofits, and individuals it would have to be instability. The concerns about virus transmission led Gov Pritzker to issue forced business closures, stay at home orders, and new workplace safety guidelines to protect both employees and customers. Although these changes initially helped to “flatten the curve”, once relaxed there has been a spike in the number of new COVID-19 cases and deaths. Although startling it reflects a larger problem with COVID-19—it is nearly impossible to predict what will happen next and the pace at which the Chicago economy will make a return to prosperity.

This has left many nonprofit organizations with more questions than answers about how to manage through the next 12 to 18 months. According to the Nonprofit Finance Fund COVID-19 Survey, 60% of respondents are currently experiencing conditions that threaten long term financial stability. At the same time, 61% reported a significant decrease (25% or more) in client usage of services. When combined these numbers reflect just how deep COVID-19 has impacted organizations. To help, clients, prospects and others, Selden Fox provides a summary of key survey findings here.

Nonprofit Survey Findings

  • Demand for Services – As the pandemic progresses there have been sudden changes in demand for services which create unique challenges for organizations. This is specifically the case when there is a rapid increase in service demand because many may not have the resources to adapt. According to the survey, 17% of respondents are currently experiencing a significant increase (more than 25%) for services while 31% anticipate such an increase later in the year. At the same time, 61% reported a significant decrease in demand for services, while 32% expect a decrease to arise later in the year. As service demands shift it is important for nonprofits to remain agile and be able to quickly respond to changing needs.
  • Revenue – As economic conditions remain challenging many organizations are facing difficulties generating both earned and donated revenue. According to the survey, 75% of respondents have reported a significant decline in earned revenue against the 3% who have reported an increase. At the same time, 50% have reported a reduction in donations against the 6% that reported an increase. While some organizations are experiencing positive changes, the overwhelming number are seeing an adverse impact.
  • Workforce Issues – Maintaining programming requires the involvement of staff and volunteers. The survey was seeking to determine if there have been disruptions in availability. The survey found that 56% of respondents reported limited staff availability due to disruptions in childcare, while 43% of respondents experienced a reduction in volunteer availability for the same reason. Unfortunately, there is often support needed from staff and volunteers that do not permit them to work remotely further exacerbating the problem.
  • Long Term Instability – The combination of decreasing revenue, the reduced demand for services, and disruption in staff availability makes it very difficult for organizations to maintain a positive financial outlook. It was found that 60% of respondents are currently facing destabilizing conditions that could impact long term viability, while 64% are anticipating this outcome later in the year. This finding highlights the need for immediate funding programs for organizations to help solidify their financial position for the duration of the pandemic. While the Paycheck Protection Program (PPP) and Main Street Lending Program permit nonprofit participation, more options are needed. 

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The challenges presented by COVID-19 will require nonprofits to streamline operations and make adjustments that not only reflect current income limitations but seek to bolster their financial position. For this reason, it is important to regularly review short- and long-term plans to make needed adjustments. If you have questions about the information outlined above or need assistance with a financial, tax, or accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

IRS Extends Nonprofit Deadlines for Form 990-Series Returns

Last month, the IRS announced that individuals and corporations had until July 15, 2020, to file and make any required payments on their income tax returns that were originally to be due on April 15, 2020. However, at the time did not extend 990-series returns (including Form 990, 990-EZ, 990-PF, 990-T and 990-N) that were either originally due or had previously been extended until May 15.

Federal Due Dates

Fortunately, the IRS announced that same relief on April 9, 2020 for the Form 900 Series. In doing so, 990-series filers with original or extended filing due dates between April 1, 2020, and July 15, 2020 were granted an automatic extension of any required filings and payments until July 15, 2020. For those nonprofit organizations needing additional time beyond July 15, 2020, who have yet to file an extension, they will be able to do so at that time, extending the ultimate due date to the 15th day of the 11th month following their year-end.

Accordingly, new due dates for 990-series returns are as follows:

Year End

Federal 990 Series
Due Date

Federal 990 Series Due
Date With Extension

06-30-19
07-31-19
08-31-19
09-30-19
10-31-19
11-30-19
12-31-19
01-31-20
02-29-20
03-31-20
11-15-19
12-15-19
01-15-20
02-15-20
03-15-20
07-15-20
07-15-20
07-15-20
07-15-20
08-15-20
07-15-20
07-15-20
07-15-20
08-15-20
09-15-20
10-15-20
11-15-20
12-15-20
01-15-21
02-15-21

In addition, for nonprofit organizations that generate unrelated business income (UBI) and are required to make estimated tax payments for Form 990-T, they will be able to use their 2018 tax liability to determine the safe harbor amount for their 2020 estimated tax payments.

State Due Dates

For nonprofit organizations that generate unrelated business income (UBI), many states, including Illinois have extended their filing deadlines for UBI tax returns to be consistent with the IRS deadlines noted above. However, unlike the IRS which has also extended the due dates for any federal estimated tax payments until July 15, 2020, Illinois has not extended the due dates for estimated payments.  As such for calendar year-end organizations, the first and second quarter 2020 estimated tax payments remain due on April 15, 2020, and June 15, 2020, respectively. The State of Illinois, however, will permit organizations to use their 2018 tax liability to determine the safe harbor amount for their 2020 estimated tax payments.

Unfortunately, for those nonprofit organizations registered as charitable organizations, many states, including Illinois, have yet to extend their charitable filing deadlines. For now, that means charitable organizations who file form AG-990-IL with the Illinois Attorney General’s Office are still subject to the following schedule.

Year End

AG-990-IL First
Extension
Due

AG-990-IL Second
Extension Due

AG-990-IL Final
Due Date *

06-30-19
07-31-19
08-31-19
09-30-19
10-31-19
11-30-19
12-31-19
01-31-20
02-28-20
03-31-20
12-31-19
01-31-20
02-29-20
03-31-20
04-30-20
05-31-20
06-30-20
07-31-20
08-31-20
09-30-20
02-29-20
03-31-20
04-30-20
05-31-20
06-30-20
07-31-20
08-31-20
09-30-20
10-31-20
11-30-20
05-15-20
06-15-20
07-15-20
08-15-20
09-15-20
10-15-20
11-15-20
12-15-20
01-15-21
02-15-21

* Must be submitted with copy of applicable 990-series return and audit report (if applicable).

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If you have questions about the information outlined above, or need assistance with nonprofit tax compliance or planning, Selden Fox can help. For additional information please call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.

Key Financial Ratios for Nonprofit Organizations

As discussed in a previous article, Why are Financial Ratios Important, there is a wealth of information that can be obtained through ratios. For a nonprofit organization, these ratios can reveal key information about an organization’s performance and financial wellness not only to senior management and the board of directors, but also donors, grantors, and the general public.

While these ratios can vary significantly between nonprofit organizations based on their sector, revenue streams, timing of expenses, and overall financial health, when taken in context, the use of ratios can be a valuable tool when comparing:

  • Organizations of similar size and age, that are located in the same area or similar locales, and that have similar missions or programs.
  • When tracking an individual nonprofit’s progress over time.

To help clients, prospective clients, and others understand which ratios to use and their value, Selden Fox is providing the following summary of some of the most common financial ratios used by nonprofit organizations.

RatioMeasuresCalculationSuggested
Minimum
 

Current
Ratio

Organizational financial health and vitality based on an ability to pay short-term financial obligations with available assets.Current assets divided by current liabilities1.0    – 2.0
(to maintain a level of safety)
Quick
Ratio
How well an organization can meet its short-term financial obligations. This ratio is often used by banks and other creditors in making lending decisions.Current assets excluding any inventory and prepaid expenses divided by current liabilities1.0
Operating ReserveWhether there are sufficient resources to support an organization and maintain its current operations and programming without having to borrow capital, assuming no additional revenue is generated.Operating reserves or expendable net assets divided by annual expenses25%
Operating
Margin
How effective an organization is at generating a surplus which can be used later if needed. This ratio may be helpful in forecasting.Net results of operations (revenues less expenses) divided by operating revenues25%
Program EfficiencyHow effective funds are used for the programs of an organization in fulfilling its mission.Program costs excluding any special projects and pass through costs divided by total expensesVaries, however some guidance suggests a minimum of 66%
Fundraising EfficiencyHow effective fundraising activities are based on the expenses required to raise contribution and event revenue.Contribution and/or event revenue divided by fundraising expensesVaries, however some guidance suggests a minimum of 4.0

If you have questions about financial ratios, or need assistance with an audit, tax or accounting issue, Selden Fox can help. For additional information, please call us at 630.954.1400, or click here to contact us. We look forward to speaking with you soon.

New Revenue Recognition – Impact on Not For Profit Entities

The purpose of this article is to provide an overview regarding the impact of the FASB Accounting Standards Codification – Topic 606, Revenue from Contracts with Customers (ASC 606) on Not For Profit entities.

This article, and the related articles, provides a brief overview of ASC 606 and omits requirements specific to public entities and many optional disclosures for non-public entities. ASC 606 and related guidance should be referred to for additional information and detail.

The new revenue recognition framework is effective for non-public entities, including not for profit entities (NFPs), for periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early application is permitted for non-public entities one year prior to the aforementioned effective periods.

Previous guidance will remain in force related to accounting for contributions; however, all revenue generated from exchange transactions will be subject to the new standard. For NFP’s, this revenue is generally derived from membership fees, sales of products and/or services, certain rights, sponsorships, and special events.

ASC 606 instructs the entity to recognize revenue for the transfer of goods or services in an amount that reflects the consideration which the entity expects it is entitled to receive from customers in exchange for those goods or services. Customers are defined as a party that has contracted with an entity to obtain goods or services in the ordinary course of business in exchange for consideration. The following steps should be applied:

  1. Identify the contract(s) with a customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations in the contract.
  5. Recognize revenue when (or as) the entity satisfies a performance obligation.

Transfer of a promised good or service to a customer in satisfaction of performance obligations results in revenue recognition. This occurs when the customer obtains control of the good or service.

Fees from membership dues may result in obligations by a NFP to provide various benefits at varying times which will require a specific judgment and estimation under the new framework. When membership dues carry traits of both contributions and exchange components, they should be bifurcated as required by ASC 606-10-15-4. Previous guidance remains in effect for differentiating contributions from exchange transactions (ASC 958-605-55-8) and contributions from exchange portions of membership dues (ASC 958-605-55-12).

A contract with a customer may create legal rights and obligations whether or not the contract is in writing. The rights and obligations under the contract may in turn give rise to contract assets and contract liabilities.

Contract assets: Commonly referred to as unbilled receivables and progress payments to be billed. A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer. These assets arise when goods or services have been transferred to a customer but customer payment is contingent on a future event.

Contract liabilities: Commonly referred to as deferred revenue and unearned revenue. A contract liability is an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration from the customer.

Illustrative Example

An NFP charges $100 annually for membership dues. Invoices are initiated and mailed on January 1. As a result of purchasing a membership, members receive one admission to an annual conference which includes a meal and a quarterly magazine. In addition, exclusive member benefits are provided continuously over the course of the year. For purposes of this example, assume that all transactions take place within one reporting period (fiscal year).

  • Identify the contract(s) with a customer.
    Membership contract
  • Identify the performance obligation(s) in the contract.
    The NFP has identified two performance obligations (1) admission to an annual conference which includes a meal, and (2) four quarterly magazines. Since admission to the annual conference and the meal received at the conference are coupled together and cannot be separately attained, they are considered one single performance obligation.
  • Determine the transaction price.
    The NFP has determined the stand-alone selling price (ASC 606-10-05-4d) of each performance obligation which is defined as the price at which an entity would sell a promised good or service separately to a customer (ASC 606-10-32-32), based on observable evidence.
  • Allocate the transaction price to the performance obligations in the contract.
    As a result of the analysis in the previous step, the value of the admission to the annual conference and corresponding meal is $24, the value of the quarterly magazine is $40 ($10 per magazine, per quarter), and management estimated the value of the other member-only benefits provided throughout the year to be $36.
  • Recognize revenue when (or as) the entity satisfies a performance obligation.
    The first performance obligation, admission to the annual conference and corresponding meal, is satisfied once the annual conference has occurred. The second performance obligation, delivery of the quarterly magazine, is satisfied over time and based on when the member receives the magazine.

Journal entries to record these transactions for a single transaction are illustrated as follows:

 Members dues are received
Cash$100
‘     Contract Liability – dues$36
‘     Contract Liability – admission$24
‘     Contract Liability – magazine$40

On January 31, the NFP recognizes one month of dues revenue

Contract Liability – dues$3
‘     Dues revenue ($36/12 x 1 mo)$3

The member attends the annual conference

Contract Liability – admission$24
‘     Admission revenue$24

The member receives the first quarterly magazine

Contract Liability – magazine$10
‘     Magazine revenue ($40/4 x 1 mag)$10

This example illustrates the bifurcation of revenue required by the new revenue recognition framework. Readers should note that the new framework uses the term “contract liability”, which is currently referred to as “deferred revenue” or “unearned revenue”. A key takeaway from this example is that revenue is recorded when the performance obligation is satisfied. Under the existing generally accepted accounting principles, dues revenue would typically be recognized on a monthly basis calculated as $100 / 12 months = $8.33. This example assumes $36 of the annual dues as an exchange transaction. Membership organizations need to determine the contribution and exchange portions of their membership dues.

If an NFP has a membership cycle, tuition year, subscription period, etc. that coincide with the NFP’s fiscal year, the new revenue standard may have little to no affect on the amounts reported in the year end financial statements. However, the new standard will require enhanced and additional note disclosures.

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If you have questions on how the new revenue recognition will affect your organization, Selden Fox can help. For additional information please call us at 630.954.1400, or click here to contact us. We look forward to serving you soon.

Form 990 Filing Requirements

Most not-for-profit organization (NPOs) must file one of three informational returns with the Internal Revenue Service (IRS) annually. Which form a NPO must file is based in its gross receipts and/or total assets. In most instances, the following guidelines will normally dictate which form a NPO should complete.

Form 990Form 990-EZForm 990-N
FormsReturn of Organization Exempt From Income TaxShort Form Return of Organization Exempt From Income TaxElectronic Notice (e-Postcard)
Gross Receipts

– OR –

greater than or equal to $200,000less than $200,000 but typically more than $50,000$50,000 or less
Total Assetsgreater than or equal to $500,000less than $500,000

Certain NPOs are not required to file annual information returns with the IRS. These include churches; schools below college level affiliated with a church or operated by a religious order; and governmental instrumentalities such as public schools. Private foundations file Form 990-PF, Return of Private Foundation, and not Form 990, Form 990-EZ, or Form 990-N.

Filing Deadlines

Form 990, Form 990-EZ, and Form 990-N are due annually by the 15th day of the fifth month after the close of the NPO’s tax year. So, the due date for a NPO with a June 30 year end is November 15, additionally November 15 is the extension deadline for NPOs with a December 31 year end. Generally, a six-month automatic extension is available to a NPO that is unable to meet the due date. NPOs that file at least 250 returns of any type with the IRS (W-2s, 1099s, 941s, etc.) during the calendar year within the NPO’s tax year and have $10 million or more in total assets at the end of the tax year must file their Form 990 electronically.

Potential Penalties

Penalties for failure to file a timely return range from $20 to $100 per day depending on the NPO’s gross receipts. The penalties are capped between 5% of the NPO’s gross receipts and $51,000 per return for the organization. In addition, penalties may apply to officers and directors who fail to file the return after receiving a notification from the IRS. If an organization fails to file its required forms for three consecutive years, the IRS automatically revokes the NPO’s exempt status. If you have any questions about filing requirements for Form 990, Form 990-EZ, or Form 990-N, please do not hesitate to contact us.

Form 990 – Schedule D – Supplemental Financial Statements

Understanding Form 990 - Chicago CPASchedule D of Form 990 reports the following supplemental financial information about the not-for-profit organization (NPO):

  • Donor advised funds;
  • Conservation easements;
  • Collections or art and historical treasures;
  • Escrow and custodial arrangements;
  • Endowment funds;
  • Land, buildings, and equipment;
  • Certain assets and liabilities; and
  • Reconciliations of revenue and expenses between the base form 990 and the NPO’s audit report.

Specifically, this article will discuss the following:

  • When Schedule D is required to be attached to base Form 990
  • Additional information regarding donor advised funds
  • Additional information regarding conservation easements

Although Schedule D covers much more than donor advised funds and conservation easements, there are disclosures in Schedule D not outlined in detail here because most of those disclosures are relatively straight forward.

When is Schedule D Required?

A NPO is required to attach Schedule D to its base form 990 if the NPO does any of the following:

  • Maintains donor advised funds or any similar funds or accounts for which donors have the right to provide advice on the distribution of amounts in such funds or accounts.
  • Received or holds a conservation easement, including easements to preserve open space, the environment, historic land areas, or historic structures.
  • Maintains collections of works of art, historical treasures, or other similar assets.
  • Has reported an escrow or custodial account liability on the base Form 990 balance sheet.
  • Serves as a custodian for amounts not reported on the base Form 990 balance sheet.
  • Provides debt counseling, debt management, credit repair, or debt negotiation services.
  • Has endowments or quasi-endowments, whether directly held or held through a related organization.
  • Reports land, buildings, or equipment on the base Form 990 balance sheet.
  • Has certain investments or other assets that are 5% or more of its total assets.
  • Reported other liabilities on the base Form 990 balance sheet.
  • Has separate audited financial statements
  • Has separate or consolidated audited financial statements that include a footnote regarding uncertain tax positions.

Donor Advised Funds

Generally, a donor advised fund is an amount irrevocably contributed to a NPO whereby the donor gets an immediate tax deduction and can make recommendations on the timing and beneficiary of distributions from the fund.

The IRS has taken issue with abusive practices in the use and administration of donor advised funds that generate questionable charitable deductions, impermissible economic benefits to donors and their families, and management fees for promoters of donor advised funds. Part I of Schedule D provides information about donor advised fund(s), including financial activity in the fund(s) and specific questions regarding the administration of the fund(s). Improper use of donor advised funds can result in the disallowance of charitable deductions to the donor; excise taxes to donors, NPOs, and managers of donor advised funds; and/or revocation of the NPO’s 501(c)(3) exemption.

Conservation Easements

Legitimate conservation easements are generally perpetual restrictions on the use of real property granted for conservation purposes. Conservation purposes include:

  • Preserving land areas for outdoor recreation by or for the education of the general public
  • Protecting the natural habitat of wildlife or plants
  • Preserving open space where preservation will yield a significant public benefit
  • Preserving historic buildings and/or structures

The IRS has been aggressively pursuing syndicated conservation easements in recent years. Promotors of these “pre-packaged” tax shelter instruments have drawn the ire of IRS officials who see them as a transaction that has no real economic substance beyond tax avoidance. As an example, a commercially marketed facade easement offering may receive scrutiny from the IRS because local zoning ordinances may already restrict modifications to buildings. This would mean the seller of interests in the property containing the easement is having its investors surrender nothing of actual value, producing no charitable deduction.

Schedule D requires a NPO with conservation easements to report the type(s), number of, and changes to conservation easements, as well as other information regarding conservation easements. Improper conservation easements or improper management of conservation easements can result in the disallowance of charitable deductions to the donor, excise taxes, and penalties to the grantor and others involved in the promotion and administration of the easement, and revocation of the grantee NPO’s 501(c)(3) exemption.

If your NPO is considering or has special reporting requirements on Schedule D and has questions, please contact us!

Form 990 – Schedule C – Political Campaign & Lobbying Activities

Understanding Form 990 - Chicago CPASchedule C of Form 990 reports information about the not-for-profit organization (NPO)’s political campaign and lobbying activities. This article will discuss the following:

  • When to attach Schedule C to Form 990
  • A general discussion on political campaign and lobbying activities and what is allowable for certain types of NPOs
  • A discussion of the 501(h) election that may be available to a NPO to provide safe harbors for lobbying activities

When Does a NPO Need to Attach Schedule C to its Form 990?

Schedule C is required to be attached to Form 990 when:

  • The NPO engaged in direct or indirect political campaign activities on behalf of or in opposition to candidates for public office;
  • If the NPO is a 501(c)(3) and the NPO engaged in lobbying activities or has a 501(h) election in effect during the tax year covered by Form 990; or
  • If the NPO is a 501(c)(4), 501(c)(5), or 501(c)(6) that receives membership dues, assessments, or similar amounts.

Form 990 defines political campaign activities as “All activities that support or oppose candidates for elective federal, state, or local public office. It does not matter whether the candidate is elected. A candidate is one who offers himself or is proposed by others for public office. Political campaign activity does not include any activity to encourage participation in the electoral process, such as voter registration or voter education, provided that the activity does not directly or indirectly support or oppose any candidate.”  Form 990 defines lobbying activities as “All activities intended to influence foreign, national, state, or local legislation. Such activities include direct lobbying (attempting to influence the legislators) and grassroots lobbying (attempting to influence legislation by influencing the general public).”

What Political Campaign and Lobbying Activities are Allowable?

501(c)(3) Organizations (Other than Private Foundations)

501(c)(3) organizations cannot engage in any political campaign activities. Engaging in these activities will likely result in the revocation of tax exempt status and monetary penalties. Anyone acting in their capacity as a 501(c)(3) organization’s Board member, management, employee, volunteer, etc. should be aware of this prohibition. 501(c)(3) organizations should monitor use of stationery/letterhead, email domain, postings on its website, list servs, social media, newsletters, communications, websites, including links on their websites, etc. to ensure nothing meeting the definition of political campaign activities is occurring at their organization.

501(c)(3) organizations can engage in lobbying activities, subject to limitations. However, if a “substantial part” of its activities are lobbying activities, the organization will face revocation of its tax-exempt status. “Substantial part” is subjective, and would be judged by a facts and circumstances surrounding the lobbying activities. The IRS will consider time devoted by individuals related to lobbying activities (including volunteers) and expenditures related to lobbying activities to determine whether or not a “substantial part” of the organization’s activities are lobbying activities. Also, some funders such as the federal government or state governments may place prohibitions on using funds provided by them for lobbying purposes.

501(c)(3) organizations that are private foundations are subject to their own limitations and prohibitions relating to political campaign and lobbying activities. Rules and guidelines relating to political campaign and lobbying activities for private foundations will need to be explored beyond this article.

501(h) Election

While the “substantial part” test puts a NPO in an uncertain situation and how facts and circumstances will be evaluated by the IRS, there is an alternative that provides NPOs more concrete lines on permissible levels of lobbying activities.

The 501(h) election is available to 501(c)(3) organizations other than churches and private foundations. The election is made by filing IRS Form 5768 Election/Revocation of Election by an Eligible 501(c)(3) Organization to Make Expenditures To Influence Legislation (Under Section 501(h) of the Internal Revenue Code). Form 5768 can be filed and applied retroactively to the first day of the year in which it was filed. The 501(h) election is then in effect for all subsequent years unless revoked by filing a second version of the 5768. The 501(h) election provides for a fixed dollar limit to the “lobbying nontaxable amount” that is based on the NPO’s exempt purpose expenditures.

Under the 501(h) election, there are two types of lobbying expenditures that must be tracked – grassroots lobbying and direct lobbying. Grassroots lobbying is generally any attempt to influence legislation through an attempt to affect the opinions of the general public or any part of the general public. Direct lobbying generally consists of costs incurred for the purposes of attempting to influence legislation through communication with any member or employee of a legislative body or with a government official or employee that may participate in the formulation of the legislation. Generally, either grassroots or direct lobbying communications need to refer to specific piece of legislation and reflect a view on the legislation.

The following chart shows the “lobbying nontaxable amount” for direct lobbying expenditures for NPOs that made the 501(h) election:

Total Exempt Purpose ExpendituresRelated Lobbying Nontaxable Amount
Not over $500,00020% of total exempt purpose expenditures
Over $500,000 but not over $1,000,000$100,000 + 15% of the excess over $500,000
Over $1,000,0000 but not over $1,500,000$175,000 + 10% of the excess over $1,000,000
Over $1,500,000 but not over $17,000,000$225,000 + 5% of the excess over $1,500,000
Over $17,000,000$1,000,000

The nontaxable amount for grassroots lobbying expenditures is 25% of the amount in the above chart, and is tested separately from direct lobbying expenditures.

If a NPO exceeds the nontaxable amount of lobbying expenditures, they will need to pay excise tax by filing Form 4720 Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code on the amount of expenditures over the nontaxable amount at 25%.

Furthermore, if the NPO’s lobbying expenditures on average exceed 150% of the nontaxable direct lobbying or grassroots lobbying amount over a four-year period, the NPO will lose its exempt status.

501(c)(4), 501(c)(5), and 501(c)(6) Organizations

Generally, 501(c)(4), 501(c)(5), and 501(c)(6) organizations can engage in lobbying activities and are not subject to the “substantial part” test or limitations related to the 501(h) election that most 501(c)(3) organizations are subject to. 501(c)(4), 501(c)(5), and 501(c)(6) organizations generally can also engage in some political campaign activities provided they are not the NPO’s primary activity. However, federal and state laws or contract provisions may exist that might limit or prohibit both lobbying and political campaign activities.

The portion of membership dues that represents lobbying and political campaign activities is not tax-deductible by members. The organization can either notify members each year of the nondeductible amount of dues related to lobbying and political campaign activities or pay a 35% proxy tax. If an organization chooses to notify members, Schedule C, Part III-B will need to be completed, which allows the IRS to monitor whether the NPO’s notice was sufficient to cover the amount of lobbying and political campaign expenditures or not. If the notice understates the NPO’s lobbying and political campaign activities, proxy tax will still need to be paid, with certain exceptions.

If your NPO is considering or is lobbying or political campaign activities, and you have questions, please do not hesitate to call us!

Form 990 – Schedule B – Schedule of Contributors

Understanding Form 990 - Chicago CPASchedule B of Form 990 reports information about the not-for-profit organization (NPO)’s contributors. This article will discuss the following:

  • When a NPO is required to file Schedule B
  • What contributors are reported on Schedule B
  • What information about contributors is reported on Schedule B
  • When Schedule B is open to public inspection
  • How to report anonymous contributors on Schedule B

When is a NPO is Required to File Schedule B?

Generally, a NPO must attach Schedule B to its Form 990 if it receives contributions of the greater of $5,000 or more than 2% of revenues from any one contributor. There are special rules for certain 501(c)(3) NPOs that may raise the reporting threshold above $5,000. There are also special rules for 501(c)(7), 501(c)(8), and 501(c)(10) organizations that may require reporting contributions lower than the $5,000 threshold.

What Donors are Reported on Schedule B?

Generally, each contributor that gave the organization money, securities, or any other type of property that total $5,000 or more within the NPO’s tax year is required to be reported on Schedule B. Again, the $5,000 threshold may be increased or decreased depending on the special rules as mentioned in the paragraph above. Fees received for performance of services are not reported on Schedule B. Also, it should be noted that the basis of accounting for Schedule B is the same basis of accounting used to complete Form 990. If a NPO uses the accrual basis of accounting to prepare its Form 990, then Schedule B must be prepared on an accrual basis, and not a cash basis. If the accrual basis of accounting is used, then certain promises to give should be reported in the tax year that the promise is made, and not each year the cash is received from the promise.

The instructions to Schedule B states that contributors include:

  • Individuals
  • Fiduciaries
  • Partnerships
  • Corporations
  • Associations
  • Trusts
  • Exempt Organizations
  • Most publicly supported organizations also need to report governmental units as contributors

What Information about Contributors is Reported on Schedule B?

The following information must be provided for each contributor required to be listed on Schedule B:

  • Name
  • Address
  • ZIP Code
  • Total amount of contributions for the current tax year
  • Type of contribution (cash contribution other than through a payroll deduction, cash contribution through a payroll deduction, and/or noncash contribution)
  • For noncash contributions, the following additional information must be provided: (1) Description of the noncash property given and (2) Fair market value of the property contributed, or if the fair market value is not readily determinable, the appraised value, or an estimated value of the property.
  • For certain gifts to 501(c)(7), 501(c)(8), and 501(c)(10) organizations, additional disclosures are required regarding the gift’s purpose, use, how the gift is held, who the transferee of the gift is, and what the relationship between the transferee and transferor is.

When is Schedule B is Open to Public Inspection?

Schedule B is open to public inspection for organizations that file 990-PF (private foundations) and section 527 political organizations that file Form 990 or 990-EZ. For all other organizations that file Form 990 or Form 990-EZ, the names and addresses of contributors are not required to be made available for public inspection. All other information on Schedule B, including the amount of contributions, description of noncash contributions, etc. is required to be made available for public inspection unless it clearly identifies the contributor.

If a NPO files a copy of its Form 990 or Form 990-EZ with a state, the NPO should not include Schedule B unless specifically required by the state. The state may inadvertently make the schedule available for public inspection.

When Can a Contributor be Reported as Anonymous on Schedule B?

A contributor should only be reported as anonymous if the NPO does not know the identity of the contributor. The NPO should report the name of the contributor on Schedule B if the NPO knows the name of the contributor whether or not the contributor wishes to remain anonymous.