IRS Form 990 is an important filing for tax-exempt arts and culture organizations. But it’s far more than just a tax filing – it’s an invaluable opportunity for organizations to craft a meaningful narrative around their work and impact.
Form 990 is a public document: one that’s scrutinized by donors, charity rating organizations, and potential partners. Form 990 is a platform that affords charitable organizations opportunities to seek out new donors, improve their reputation, and advance the mission of their organization.
Understanding the key areas that an organization should present well in its Form 990 filing is key to a smooth filing process that boosts your nonprofit’s standing with donors and the wider community. In this overview, we provide a summary of each of these focus areas, highlighting key considerations and sharing a series of best practices that nonprofit leaders can adopt.
IRS Form 990, Return of Organization Exempt from Income Tax, is an informational tax filing that should be filed with the IRS every year. The form summarizes details on program activities, governance, financial performance, and other matters directly related to the operations of the tax-exempt organization.
The form was significantly revamped in the early 2000s in response to rampant abuse of the nonprofit public charity status. Its role today is to provide the public with faith and trust in charitable organizations, shining light on the wider operations of a nonprofit organization.
All Form 990 filings are public. Many arts and cultural institutions publish their Form 990 on their website and charity rating bodies like GuideStar and Charity Navigator use the data in Form 990 to shape the ratings they provide nonprofit organizations. Donors actively consult Form 990, as do grantmakers, journalists, and a wide variety of other entities.
Given the broad audience for Form 990 and its importance in driving the overall narrative surrounding an organization, leaders of arts and culture nonprofits must take a considered approach to preparing their filing each year.
Of particular concern are the following areas:
Read on as we explore each of these areas in more detail and highlight best practices that arts and cultural institutions should be aware of for each topic.
A nonprofit organization’s program activities are the items, policies, and initiatives that it has in place to enact the organization’s wider mission. Organizations should list their top three programs by program expense in Form 990.
Often, organizations only list the name of these programs: for example “School Visits to Museum”. This does little to reflect the impact of the program on the nonprofit’s wider goals. Instead, use this opportunity to create a narrative around your organization’s program activities. Add quantitative metrics that demonstrate impact, such as “Provided free museum admission and educational experiences for 10,000 elementary school children from underprivileged neighborhoods”.
The IRS allows organizations to write a short narrative paragraph for each activity. Take the opportunity to describe your organization’s programs in more detail and add impactful metrics that illustrate the role program activities play in helping your nonprofit advance its mission.
Nonprofit organizations disclose information about their governance and internal controls on Part VI of Form 990. This is an enlightening section that illustrates to interested parties how well your organization is run.
On the first line of this section, organizations report the number of board members that have voting interests in strategic matters, and on the second line, they report how many of these board members are independent. Ideally, a nonprofit board should be largely independent and have few conflicts of interest, although there can be exceptions to this rule.
Organizations must have a clear policy that outlines what happens in instances where board members have a conflict of interest. This policy should be explicitly stated on Form 990. One situation that can lead to errors is when a family member of a board member works for a nonprofit organization and receives compensation over $10,000. The IRS considers this to be a transaction with an “interested party” and requires this to be disclosed on Schedule L.
An organization’s functional expense allocation refers to how it splits expenses between program expenses, management and administrative expenses, and fundraising expenses. It’s not uncommon for nonprofits to allocate expenses incorrectly in an attempt to cast the organization in a more favorable light, allocating almost all expenses as program expenses.
Generally, a healthy functional expense allocation would see between 70 – 80% of a nonprofit’s expenses be allocated toward program activities, with the remaining expenses split roughly equally between management and administrative expenses and fundraising expenses.
Allocating a percentage of expenses to these activities reassures donors and other interested parties that the organization is expending sufficient resources to ensure it can continue operating on an ongoing basis. Make sure that officers of the organization allocate some percentage of their time to fundraising, as this is an activity that’s vital to the organization.
Unlike the vast majority of tax filings, an organization’s financial performance is not front-and-center of Form 990, instead appearing around three-quarters of the way through the document. This allows the reporting organization ample opportunity to detail its programs, internal controls, and functional expenses before presenting its financials.
The financial information reported in your organization’s Form 990 should closely match that in your audited financial statements. Charity rating agencies use automated technologies to calculate metrics such as debt-to-equity ratios, cash on hand, and the net profit of your organization. Financial leaders at nonprofits should keep these in mind as they assess their strategic goals throughout the year.
Reporting the compensation of the leading executives of your nonprofit organization is non-negotiable and leaders must accept that their compensation is public knowledge. The IRS specifies several rules that determine which employees’ compensation must be reported, including:
These thresholds have remained consistent in recent years, even as the wider nonprofit sector has seen significant salary growth.
Arts and culture organizations often participate in foreign activities, triggering the need to file Form 990 Schedule F, Statement of Activities Outside the United States. Despite the name of the form, nonprofits should be aware that it’s not just physical activities outside of the US that can trigger this reporting requirement.
All kinds of activities can necessitate the filing of Schedule F and other foreign reporting requirements, from bringing performers from outside the US to your organization to having funds in an international bank account. Understanding these requirements is vital as penalties for non-compliance can be steep.
Effectively leveraging the opportunity that Form 990 affords arts and culture nonprofits demands a thoughtful approach anchored in deep knowledge of the filing itself. Form 990 can be a complex filing, but it’s one that’s pivotal in attracting donor dollars and grant funding.
The support of an accounting firm with significant experience advising arts and culture nonprofits is an invaluable asset to organizations. At Smith + Howard, our nonprofit accounting team has over fifty years of experience serving arts and culture nonprofit organizations across the nation.
We provide ongoing support to a diverse range of arts and culture institutions, assisting with Form 990 filings and serving as a trusted long-term partner that helps organizations thrive. To learn more about Smith + Howard’s accounting services for nonprofit organizations, contact an advisor today.
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