Charities and the Form 990 in 2019

The Taxpayer First Act, signed into law by President Trump on July 1, requires charities to electronically file all returns in the Form 990 series (Return of Organization Exempt from Income Tax) and Form 8872 (Report of Political Contributions). Previously, only small organizations who chose to file, private foundations and certain trusts and larger organizations were required to e-file.

Charities classified under Internal Revenue Code Section 501(c)(3), with the exception of churches or similar religious organizations, are now required to file a Form 990 each year.  The Form 990 is an informational tax return filed by tax-exempt organizations. Even the smallest charities are required to file a version of the Form 990 each year. These returns, available to the public and accessible on various websites, are a treasure trove of information about the filing charity. Prospective donors, their financial advisors, and rating organizations routinely read Forms 990. What most charities do not recognize, and take advantage of, is the opportunity to use the Form 990 as a marketing tool.

Just as registered investment advisers often use the “brochure,” a required disclosure document, to advertise the firm’s strengths and reinforce branding, the Form 990 can be utilized for these same purposes by a charity. Here is an opportunity for any charity to present its laudable goals, integrity, operational success and meaningful impact, in the process of validating its right to tax-exempt status.

The Form 990 asks numerous and detailed questions designed to elicit information about an organization’s purpose, operations, compliance, and successful management. Charitable organizations are required to provide certain financial statistics, or metrics, in a way that permits comparison with other tax-exempts. For example, 501(c)(3)s are required to report amounts for grants and allocations made to others and for gifts, grants, contributions and membership fees received. The numbers reported tell a story about the organization, one that can significantly impact ratings and fundraising.

In order to take advantage of the opportunity to publicize its merits, an organization should plan well ahead of the due date for the filing. The Form 990 is due four and a half months following the end of the organization’s fiscal year. Therefore, at the beginning of each fiscal year, the charitable entity should review its written policies and its program plans for the coming year with a view to being able to provide favorable responses to the questions in the Form 990.

The first narrative question asks the organization to describe its mission, providing an opportunity to inspire potential donors. The Form then asks the organization to describe its program service accomplishments for each of its three largest program services, as measured by expenses. Because rating organizations routinely grade organizations based on allocation of expenditures, reporting impressive allocations can lead to higher ratings and more donations.

Questions designed to extract information demonstrating that the organization has “good governance,” allow the charity to, in effect, “market” its “good governance” practices.  The questions ask about existence and implementation of the organization’s policies and procedures aimed at: 1) compliance with the law, 2) adherence to the budget, and 3) (most important to potential donors and rating organizations) minimization of conflicts of interest. By answering questions in a way that shows successful implementation of robust internal policies and procedures, the charity enhances its reputation for integrity. Moreover, the charity’s ability to report that its financials are independently audited establishes that the organization’s financial statements are accurate and fair—in essence, trustworthy.

Form 990 is not new, but the 2017 Tax Cuts and Jobs Act (the Act) contained provisions relevant to charities and their donors. First, the Act made permanent the temporary income tax benefits for charitable rollovers from IRAs to qualifying charities. Second, the Act repealed the limitation on deductions, including those for charitable contributions, for high-income taxpayers (the so-called “Pease Limitation” on itemized deductions). Finally, and most importantly, the Act increased the charitable contribution deduction limit for an individual donating cash to a charity from 50% of adjusted gross income to 60%, something from which many taxpayers doubtlessly will benefit.  With the promise of higher donations from high-net-worth taxpayers (who have also benefited from the Act’s tax cut, in general), charitable organizations should seize this opportunity by using the Form 990 to achieve higher ratings and reach the widest audience possible.

Natalie Roberts is an estate planning and tax attorney at Johnson, Pope, Bokor, Ruppel & Burns, LLP. She focuses on both individual estate planning and business taxation, including family business succession planning.