How to Read Form 990 as a Board Member

February 13, 2024

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Form 990 is a crucial document for all nonprofit organizations, serving both as an informational tax filing and a marketing tool to advance the organization’s mission. The filing is a public document; one that’s scrutinized by potential donors, community members, and grantmakers. 

Many independent schools overlook some of the opportunities afforded by Form 990, viewing it primarily as a tax filing, and less as a stage to create a compelling narrative around the mission of their school. By using Form 990 as a platform to communicate the various ways your organization is achieving its mission, organizations can unlock a wide variety of benefits. 

As a board member of an independent school or any other nonprofit organization, you must understand how to read the key components of Form 990. In this guide, we explore the key elements you should pay attention to before finalizing your organization’s Form 990 submission. 

Key Components of Form 990 for Board Members

IRS Form 990, Return of Organization Exempt from Income Tax, is an informational tax filing that discloses the financial performance of a tax-exempt organization. But in reality, Form 990 is much more than that: organizations should consider it an advertising tool to convey their mission, purpose, and impact to all of their stakeholders and community members. 

There are many parts and schedules to IRS Form 990 – some will always be included, whereas others may only be completed if the unique needs of your organization call for it. Below, we’ve summarized the most important components of Form 990 and outlined the key considerations to bear in mind as you assess them. 

Part VII: Compensation

A key focus of Form 990 is the compensation paid to the top executives of the organization: anyone who meets the criteria as an officer, director, trustee, or key employee, plus the five highest compensated employees. 

This compensation takes various forms: the base compensation of the employee, plus any non-salary compensation they might receive, such as tuition, housing, or vehicle allowances. Generally speaking, these additional forms of compensation should not be higher than the employee’s base compensation. If this isn’t the case, the reasons for this should be disclosed in Schedule J.

The reported compensation should be in line with similar organizations and with the overall performance of the organization. Given that Form 990 is a public document, and that compensation is reported on a calendar year basis, it’s relatively straightforward for executive compensation to be benchmarked against compensation at similar organizations e.g. other independent schools in your region. 

Verify whether any board members received compensation during the reporting period. The majority of the time, board members should not be compensated: this compromises the independence of the board. While there may be some exceptions to this rule, a significant majority of board members must be independent. 

Part III: Program Accomplishments

Another key section of Form 990 is Part III: Statement of Program Service Accomplishments. This section reports the revenues of the organization, breaking out distinct revenue streams and describing how they are channeled toward program activities. 

Organizations should endeavor to include detailed program narratives in this section. These should include a wealth of quantitative data that provides readers with an in-depth understanding of the impact the school’s programs are making on its students and surrounding communities. 

Part VIII: Revenue

Part VIII of Form 990 contains an organization’s Statement of Revenue and requires filers to detail the sources of the organization’s revenue. There are a couple of key areas for board members to watch out for in this section of Form 990. 

The first is the presence of Unrelated Business Income (UBI): revenue from activities that are not related to the organization’s tax-exempt purpose. This revenue can be achieved in a wide variety of ways, from receiving pass-through investment income through a Schedule K-1 to renting out the school’s parking lot for a local event. If an organization does have UBI, it must file Form 990-T and pay Unrelated Business Income Tax (UBIT)

It’s normal to have some form of UBIT, but it should not compose the majority of your organization’s revenues. For independent schools, a significant majority of revenues should come from program-related sources, such as tuition payments and extra-curricular activities. Being required to pay UBIT isn’t inherently a bad thing: it simply means your organization generated additional income to better fund its mission.     

Schedule A of Form 990 documents the source of an organization’s revenue, outlining whether these revenues are sourced from the public, program activities, grants, or other sources. Pay particular attention to public sources. It’s important that an organization has a variety of donors and is not solely reliant on one or two large donors. If this is the case, the organization may fail the Public Support Test, which could cause it to lose its status as a public charity. 

Part IX: Expenses

The leaders of nonprofit organizations are tasked with being responsible stewards of their organization’s capital. Part IX of Form 990 breaks down an organization’s expenses into three categories:

  • Program Expenses: costs incurred related to the programs conducted by the organization, including teacher salaries, classroom supplies, and more. 
  • Management and General Expenses: costs associated with running the organization, including administrator salaries, fees for professional services, maintenance, and more. 
  • Fundraising Expenses: costs associated with fundraising activities, such as the cost of hosting a fundraising event or conducting donor outreach activities. 

A vast majority of an organization’s expenses should be allocated toward program activities, but it’s important that your organization also shows that it invests in management and fundraising expenses too. Allocating some capital to these areas ensures the organization is run effectively, invests in the future, and maintains the donor relationships required to grow.  

Additional Disclosures

There are several other schedules that independent schools typically must include in their Form 990 filings, including:

  • Schedule E: this schedule is unique to private schools and is used to document non-discrimination and financial aid policies. Additionally, if the school participates in any assistance from governmental agencies, the nature of that support should be disclosed in this schedule.
  • Schedule F: this schedule reports foreign activities. Schools that offer opportunities for their students to travel internationally for academic, cultural, or religious purposes, are often required to file this schedule. Additional activities can include recruiting overseas, grants paid for international students and investments held by the school outside of the United States.
  • Schedule I: this schedule documents the grants or financial aid that have been disbursed to students. Organizations must disclose the number of students who received financial aid, the total amount of financial aid awarded, and the criteria used to determine access to financial aid. 

Every independent school has unique filing requirements and your organization should retain an experienced nonprofit accounting firm to prepare your Form 990 and ensure your organization fulfills all compliance requirements. 

Smith + Howard: Experienced Accounting Firm for Nonprofits

An independent school’s Form 990 filing is an extremely important task, which is why all board members must have a comprehensive understanding of the information that should be conveyed in the filing. Far more than just a tax filing, Form 990 is a platform to define the narrative around your organization’s mission, attract new donors, and enhance its reputation. 

By growing their understanding of the key areas of Form 990 outlined here, independent school board members will be well-placed to lead their organizations to continued success. If you need an experienced partner to guide you through the journey, consider reaching out to Smith + Howard

Our highly specialized nonprofit accounting team brings significant expertise working with independent schools across the country. With extensive experience across accounting, assurance, tax, and more, our professionals are well-equipped to serve as strategic advisors to independent schools. 

To learn more about Smith + Howard’s services for independent schools, contact an advisor today

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