Nonprofit Tax Help

David McRee, CPA

File the Right Form 990

One of the most easily overlooked opportunities to save time and money occurs each year when a return preparer gets started with preparing a tax-exempt organization's Form 990. They often fail to check the filing thresholds to see which form is appropriate to file for that organization. The choices for a public charity with no unrelated business taxable income are, in order of increasing complexity:
  • Form 990-N
  • Form 990-EZ
  • Form 990
For many organizations, it is preferable to file the simplest form allowed. That would be Form 990-N, the electronic postcard.
For tax years beginning in 2010, many more small organizations will be eligible to submit Form 990-N rather than preparing and filing Form 990-EZ because of the higher gross receipts threshold.
 In years 2007 through 2009, an organization had to have gross receipts of "normally $25,000 or less" to be eligible to submit Form 990-N. But for 2010, that gross receipts threshold has increased to "normally $50,000 or less." (See caution below).
 If you are responsible for preparing Form 990-EZ for one or more organizations, be sure to see if they are eligible to file Form 990-N rather than 990-EZ for tax years beginning in 2010 and in  future years. It may save the organization significant time and money as well as reduce the chances for penalty-producing errors by filing the simplest form that is appropriate for their situation. Even if they are not eligible to submit Form 990-N, they may be able to file Form 990-EZ instead of the long Form 990.
Every year I encounter organizations that filed the full long-form 990 when they were eligible to file Form 990-EZ. (And they often have glaring errors). I have no doubt that many organizations will file Form 990-EZ in 2010 when they could simply submit electronic Form 990-N.  Each year you need to determine which form is appropriate for a particular organization.
CAUTION! "Normally $50,000 or less" is based on a 3-year average (including the year for which the return is being prepared). An organization can have gross receipts of significantly less than $50,000 in 2010, but still have a 3-year average that is above the filing threshold, thus requiring it to file Form 990-EZ or Form 990, rather than Form 990-N.
Even though an organization is eligible to file Form 990-N, that does not mean it is the only or best option. Any organization can choose to file a Form 990-EZ or a full Form 990 in lieu of Form 990-N. However if it does so, it must file a COMPLETE return with all required schedules.  Gone are the days when it was possible to file a zero return with a notation that the organization was not required to file because it was below the filing threshold.
One example of an organization that might choose to file Form 990-EZ rather than Form 990-N is an organization that is required by a grant-making organization to submit a copy of Form 990-EZ as part of a grant application.
Helpful links to relevant information on the IRS web site:
Filing thresholds for the Form 990 series(different each year between 2007 & 2010)
Calculating the 3-year average gross receipts for organizations in existence for less than 3 years. (You might be surprised to learn that a one year old organization can have up to $75,000 in gross receipts and pledges and still be eligible to submit Form 990-N)
Helpful Hint: When calculating the 3-year gross receipts average, uncollected pledges are included in gross receipts for the first year of existence (even for cash basis filers), but pledges made in subsequent years are not.  Seems strange, but that is what the IRS instructions dictate.
The IRS implementation of the Form 990-N filing requirement and the new rules regarding automatic loss of tax-exempt status for 3 consecutive years of non-filing has not gone smoothly. Many organizations are either receiving penalty notices in error, or had filed under the Voluntary Compliance Program when not eligible and are now receiving large penalty assessments. If you find yourself in a situation and are in need of assistance, please contact me.