IRS Form 990 and Form 990EZ
The new Form 990 has changed the requirements for reporting of compensation of officers, key employees and board members. There also are changes for reporting the top paid employees other than officers and key employees and for reporting the top paid independent contractors. Under transitional rules, filers with gross receipts of less than $1 million and total assets of less than $2.5 million can file the 2008 Form 990EZ, which has changed to a lesser degree. These forms relate to returns filed for years beginning on or after Jan. 1, 2008.
Where is compensation reported?
Part VII of the main “core” form requires a listing of officers, directors, key employees, highest compensated employees and independent contractors, combining information that was required on the prior versions of Form 990, plus information on the prior version of Schedule A.
One result is that all types of tax-exempt filers, including trade associations and social clubs, may be subject to reporting the five highest compensated employees and five highest paid independent contractors. Previously, only 501(c)(3) entities reported these two groups. There also has been a change in the minimum threshold for reporting these groups. The prior threshold of $50,000 has been increased to $100,000. Associations and clubs eligible to file the 990EZ will not need to report these groups for 2008, but they will be required to make disclosures if they choose to file the longer Form 990.
Schedule J will be required for filers that answer certain questions “yes.” Such filers will include those with employees paid more than $150,000 (including compensation from related organizations). Former employees reported on Part VII also are reported on Schedule J. Current officers, directors or trustees, and highest paid employees are generally reported on Schedule J if the sum of their W-2 compensation and the value of their fringe benefits exceed $150,000.
Part IX, “Statement of Functional Expenses,” retains the prior version’s line for “Compensation of current officers, directors, trustees and key employees.”
Whose compensation is reported on the new Form 990?
The instructions now include definitions of many of the terms that previously were the subject of interpretation.
“Officers” are defined as persons elected or appointed to manage the organization’s daily operations (e.g., president, vice president, secretary or treasurer). They generally are determined according to the governing documents, such as by-laws and board resolutions. The instructions note that if organizations appoint “officers of the board” as well as “officers of the corporation,” then both groups should be reported in Part VII. Additionally, the instructions create an exception to the general definition of officer, but only for Form 990 reporting purposes. Regardless of their official status, two persons are always to be treated as officers for reporting purposes – the organization’s top management official and the top financial official (the person who has the ultimate responsibility for managing the organization’s finances). Organizations may want to review the titles and responsibilities of positions in the organization with respect to who should have the powers and responsibilities of an officer for future years as the IRS continues to focus on governance policies and procedures.
“Key employee” is newly defined using a three-part test. First, the individual is someone other than an officer, director or trustee who has reportable compensation from the organization and all related organizations in excess of $150,000 for the calendar year ending in the organization’s tax year. Solely for this first test, only Form W-2 and Form 1099 compensation is considered; it excludes the value of nontaxable and tax-deferred fringe benefits in determining whether the $150,000 threshold is exceeded. Second, a “responsibility test” detailed in the instructions must be met. Third, key employees are limited to the top 20 employees meeting the first two tests.
“Director or trustee” is a voting member of the governing body. This definition includes anyone who served in such a capacity at any time during the Form 990 filer’s tax year. It is similar to usage for the prior version of the Form 990.
“Former officers, directors, trustees and key employees” has been defined so that certain smaller payments to persons may not be required to be disclosed. There also is a five-year look-back period that generally eliminates the need to report someone who has not been active in the organization for more than five years.
Highest paid employees other than officers, directors, trustees and key employees who receive more than $100,000 of reportable compensation, including compensation from related organizations, are reported in Section A of Part VII.
Independent contractors that received more than $100,000 of compensation from the organization are reported in Section B of Part VII if they are one of the five highest paid contractors. The distinction between professional services and other services has been eliminated. So, all service providers will be considered in a single section on the form.
When is calendar year compensation reported?
All organizations filing the longer Form 990 will use calendar year compensation for purposes of Part VII and Schedule J. Previously, fiscal year organizations generally provided information consistent with their fiscal year throughout the Form 990. There are new standardized definitions of compensation. For part VII, which lists name, average hours per week and position in the organization, “reportable compensation” for columns D and E is taken from the Form W-2 (generally wages subject to Medicare tax) or Form 1099-MISC (non-employee compensation) for employees and independent contractors, respectively.
Reportable compensation from related organizations is reported in a separate column on Part VII. In other words, related party compensation is no longer reported on a separate schedule; instead, it appears on the same line as compensation from the organization filing the Form 990.
Part VII column F requires the amount of other compensation (other than “reportable compensation”) to be reported, encompassing nontaxable or tax-deferred benefits. Retirement benefits, medical/health benefits and deferred compensation are reported regardless of the amounts. Other benefits may not need to be reported on Part VII of the core Form 990 if they are below $10,000 for the year. However, this $10,000 threshold does not apply when an individual is listed on Schedule J because reporting of benefits is required regardless of the amount. A table appears in the instructions to provide guidance with respect to where specific types of compensation should be reported.
Form 990EZ filers will have an option to use either a simplified version of the 2008 Form 990 instructions or use the 2007 Form 990EZ instructions to report compensation. The method used on the 2008 form must be followed in the future when subsequent Form 990EZs are filed.
When is fiscal year compensation needed?
The changes to reporting compensation for Part VII of the Form 990 and Schedule J do not affect how organizations report compensation and benefits on their books or on their financial statements. Therefore, Part IX, “Statement of Functional Expenses,” will be based on the fiscal year amounts used for book purposes. However, there continues to be a need to separately state the compensation of current officers and directors on this part of the Form 990. Furthermore, compensation includes all forms of income and other benefits earned or received, including retirement plan contributions and other employee benefits. Thus, the information required encompasses total compensation as opposed to straight salary.
For 501(c)(3) and 501(c)(4) organizations, these amounts need to be allocated among program services, management and general, and fundraising categories. These same organizations are required to separately state compensation paid to “disqualified persons.” A disqualified person is any person in a position to exercise substantial influence over the affairs of a particular tax-exempt organization at any time during a five-year period ending on the date of the transaction. The term includes certain former officers, directors, trustees or employees, as well as certain donors.
What are the organization’s policies and procedures?
Beyond the dollar amounts of compensation, the core Form 990 for 2008 has questions regarding how the governing body determines the appropriateness of compensation. Part VI of the core form requires all filers to describe the process for setting compensation of top management, key employees, officers and directors. For those otherwise required to complete Schedule J, there is a series of questions on benefits relating to travel, housing, club dues, and other kinds of compensation beyond a base salary. Another change implemented with the restructuring of the old Schedule A is the new Schedule L. All organizations will be required to complete parts of Schedule L that detail information on business transactions, loans, and grants or other assistance over certain dollar amounts that involve “interested persons.” An interested person may be a current or former officer, director, trustee or key employee and also may include family members and certain business entities related to such persons.
The IRS agenda for transparency and good governance practices for tax-exempt organizations has resulted in massive changes in the reporting required on Form 990. The imposition of uniform definitions, including a glossary in the Form 990 instructions, and uniform sources of compensation data based on Forms W-2 and 1099-MISC will provide an objective basis for reporting and may make it easier to compare the compensation paid by two different organizations. There also is a renewed emphasis on payments by related organizations and transactions with related parties. The IRS has taken the opportunity to expand the reporting requirements of tax-exempt organizations other than Section 501(c)(3) organizations. There is some relief to taxpayers in that the $50,000 threshold for highly paid employees and the top paid independent contractors has been increased to $100,000.
In order to properly prepare the compensation sections of the 2008 Form 990, organizations need to ensure the following steps are taken:
- Verify the organization is correctly applying definitions such as officer, key employee, interested persons and disqualified persons. Review the process for identifying these parties on an ongoing basis.
- Develop disclosure statements that are responsive to the questions on the return (Part VI and Schedule J), especially with regard to policies and procedures. The IRS admits that the tax laws do not necessarily specify particular governance practices, but the IRS may select returns for audit based on the disclosure statements and also may assess penalties for inaccurate or incomplete answers.
- Have a plan for collecting and organizing the compensation data needed to complete the various parts of the return. The Form 990 is typically due well after the due date for Forms W-2 and 1099-MISC. Related party information may need to be requested if the filing organization is not in custody of those records. Fringe benefit reporting is covered in depth in the instructions, and each benefit may need to be valued. For organizations that do not use the calendar year as their fiscal year, there will be different reporting years within the form depending upon which part of the form is being completed.
For assistance with your particular situation, please contact us.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
All Not-For-Profit News Not-For-Profit Overview