Across the nation, many independent schools benefit from affiliations with churches. Churches often establish independent schools to enhance the educational options available in their communities, providing high-quality education with a religious component.
Churches and other religious organizations are, by definition, tax-exempt organizations. They are not required to file Form 990, Return of Organization Exempt from Income Tax. In some instances, this filing exemption extends to independent schools affiliated with churches. But in other scenarios, it may be required or beneficial for an independent school to file Form 990, regardless of the religious organization they are affiliated with.
This can be a complex topic, with various factors for the leaders of both churches and affiliated independent schools to consider. In this guide, we outline these factors, exploring when it may be prudent for an independent school to file Form 990 and sharing what the Form 990 filing process entails.
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When it comes to determining whether an independent school is required to file Form 990 each year, it’s important to understand the concept of affiliation.
Exactly what constitutes affiliation is somewhat vague. The IRS states that the following religious organizations are exempt from filing Form 990:
“A school below college level affiliated with a church or operated by a religious order described in Regulations section 1.6033-2(g)(1)(vii).”
There is no checklist that defines exactly what either “affiliated with a church” or “operated by a religious order” tangibly means. In practice, independent schools may have a shared board, shared employees, or a written understanding that the school will operate under the direction of the religious organization it is affiliated with.
Many church-affiliated independent schools follow this model, especially at first. However, as schools grow and evolve, they may either be required to file a Form 990 due to the nature of their activities, or seek benefits from filing a Form 990.
Several events may trigger a church-affiliated independent school to have a Form 990 or Form 990-T filing requirement. Below, we explore several reasons that prompt independent schools to file Form 990 or Form 990-T.
When a tax-exempt organization engages in an unrelated activity compared to their mission and competes with a for-profit, taxable business, they are liable for tax on that income. This can occur in a variety of ways for independent schools. One example would be if a school were to rent facilities such as auditoriums, sports fields, or parking lots. This could manifest in multiple ways: for example, the auditorium could be rented to a local production company, or the parking lot may be rented out to a film crew during the school’s summer vacation.
When a school engages in these sorts of activities, it is in direct competition with for-profit businesses. This activity must be reported on Form 990-T and the school must pay Unrelated Business Income Tax (UBIT) on income derived from these activities.
When a school is first established, it’s likely that the board of the independent school has significant overlap with the church. But over time, this relationship can evolve as board members and employees move on. After several years, the affiliation between church and school may seem significantly looser than it was when the school was established.
In these situations, many independent schools may elect to file Form 990 out of an abundance of caution. Because the definition of what constitutes affiliation is so vague, this can be a difficult decision. Boards should consult qualified nonprofit accounting and tax professionals before committing to making this filing.
Form 990 is much more than just a filing requirement for nonprofit organizations: it’s an invaluable opportunity to market the school to potential donors. Form 990 is a public document. It’s hosted on all kinds of online platforms, from Charity Navigator and GuideStar to the IRS website. A nonprofit’s score on platforms like Charity Navigator can have a significant impact on its ability to attract donations.
A comprehensive Form 990 filing demonstrates that an organization is effectively run and is making a tangible contribution towards its mission. Potential donors will look to Form 990 when determining whether to contribute to an organization. This typically means that independent schools with a well-constructed Form 990 are better positioned to solicit donor contributions than church-affiliated schools that elect not to file.
Preparing to file Form 990 for the first time, whether by requirement or choice, can be an arduous process for independent schools. After the first year, the filing process becomes easier as accounting frameworks and workflows are established.
However, for first-time filers, compiling required information will put additional strain on the school’s operational staff and board members, who will have to accept a range of new responsibilities they previously did not have to consider. The support of an experienced accounting firm and a team that focuses on making the process as seamless as possible every year is invaluable in this process..
Regardless of the reason an independent school chooses to file Form 990, it’s vital they have the support of an accounting firm with experience helping similar organizations navigate this process.
Form 990 is an important document, both for compliance and fundraising purposes. Independent schools should take a strategic approach that fulfills filing requirements while enabling them to paint a powerful narrative on the impact of their school.
At Smith + Howard, our independent schools accounting team works with a wide range of church-affiliated schools across the United States. We are deeply involved with organizations across the country that work with independent schools and are committed to educating and informing the independent school community on new developments in the fields of tax and accounting.
With deep expertise in tax, accounting, and assurance services for independent schools, Smith + Howard provides a comprehensive suite of solutions that enables independent schools to build a strong financial foundation.
To learn more about how Smith + Howard can support your independent school, contact an advisor today.
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