Tuesday May 3, 2022
Any accounting, business and tax advice contained in this podcast is not intended as a thorough in depth analysis of specific issues. Nor is it a substitute for forming information. Nor is it sufficient to avoid tax related penalties. If you have specific questions that you need advice for, be sure to schedule a strategy session and not solely rely on information in this podcast.
Hey, everyone, it's Chyla Graham, CNRG Accounting Advisory. Welcome to another episode of The Nonprofit Ace Podcast. We are in season 10. In the first three episodes, I talked more about audit items. And now I'm doing a little shift, and we're going to talk more about the 990. So be sure to check out all our previous 990 episodes, they're going to be in the link where I'd taken the most I would say about the components of the 990, is going to be in So What's The 990.
So well, this season, what I really want to dig into some of the other schedules, so not just like what the 990 is, but talk a little bit more about the common schedules that we see most of our clients completing, and giving you some tips on what you could do on yours, or what to look out for on yours. So I'm starting with Schedule A.
The reason I want to start with this schedule is because there are common reasons why people get their 990 rejected. And it's usually Schedule A and B. Schedule A and B are the easy ones because depending on what program your tax preparer is using, it may not prompt them to say like yo, this form is missing. And so this is why it's important that you do your own review of your 990 to make sure it's complete that there's nothing missing. And so that's why I want to talk about these components.
The components I'm going to talk about are Schedule A, public charity status, Schedule B, which is about your contributors, Schedule G for fundraising, and Schedule I, which is for grants. So Schedule A is about your public charity status. That's the first part. And typically for 501c3 organizations, you're typically going to select a box seven. So box seven, let me read you the description. And I'm reading from the form 990 compliance guide for 2021. Clark Nuber prepares a copy of this every year. And so it's always helpful to get a copy, if you guys are going to be doing your own 990 and sort of want to deep dive this one is published by Wolters Kluwer, I want to say is maybe five or $600.
So it is pretty expensive. And so usually it's going to be your accountant or tax preparer who has a copy of this. And so I think it's something that's helpful that you have every couple of years to make sure that, if you're doing it in house, you are addressing things correctly, 990 forms don't really change that much year over year. And so maybe you don't need to get it every year. But it is helpful to make sure that you have the one that's going to be relevant for the tax year that you're filing. If you're like wow, we don't know what we're doing. Maybe get a copy so that you can read through some of the guidance that they give. Okay, so this is on part one where they talk about the reason for your public charity status.
So why do you have the status? What about your organization prompts you saying that you are a public charity? So like I said, most 501c3’s who need to file a 990 are going to be in box seven or 10. Box seven is an organization that normally receives a substantial part of its import from a government unit or from the general public as described in this other place. That is where most organizations would fall. However, there are some organizations that fall into category number 10. Category number 10 is an organization that normally receives one more than 33 and a third of its support from contributions, membership fees, and gross receipts from activities related to exempt function and to no more than 33 and a third of its support from gross investment income and unrelated business, taxable income. Those are the abridged versions.
Some most organizations are going to say yes, we get most of our support either from the government or the general public. Or maybe we have a fee for a service program, where that's where we’re saying the gross receipts from activities related to your exempt functions and we don't have these large investments or unrelated business income. So think about your organization, are you an organization that is primarily contribution or government funding focus, you're probably selecting box seven.
If you're an organization that also does a fee for service, and that fee for service that might include if your ticket sales for a program that you do is more than a third of your revenue. You might be selecting box number 10, you should be reviewing this page when you get your copy of your draft 990 to say, is this box correct? Do I understand what our tax preparer is saying when they select this one?
The next piece is going to be part two of the Schedule A and this is where it talks about your actual public support versus your total support. So there's a part two and part three, this schedule is very similar, aka practically the same, but it depends on if you've selected which box.
So if you've selected box seven, on that first part that I talked about, you're going to be doing part two, if you selected box 10, you're going to be doing part three. So if you're just like these numbers look the same, why is it that one, that's sort of where they're going with that. So here is where you're going to break down, what category does our funding fall into? And this is one of the reasons it's good to use the same tax preparer year after year because they will have that knowledge.
But if you go to a new tax preparer, they're going to be able to pull this together for you, they're going to use the previous information. But one of the key things though, is in Section C of both of these parts, you're going to see a section that says computation of public support percentage, and this is really what I wanted to point out for you all, in the first five years of your operations, the IRS is typically gonna say, Okay, you're ??? in your fifth year, we're not going to do this test for public support. One, because in my opinion, they're saying, you're probably self funding a lot of this, it's not uncommon that organizations are using the same few people.
But as you get older as an organization, the IRS is wanting to make sure, are you truly getting support from the general public. Is that what's happening or not? And the way they are doing that is, depending on your programming, your tax preparer is using, as you're filling in the people's names, it’s doing this calculation on the back end. And so this is a calculation that you can do manually, I have done it manually before. And that's why it's important that you keep donor records, even from the very beginning, or as soon as you can. So maybe you're like, Oh, we didn't keep that we didn't keep track of it.
Now you can, start now. So start keeping track of who's giving you how much money because the IRS is going to start to say like, Okay, well, if Chyla is the only one giving you money, Are you truly a public charity? And so they'll start to say, okay, Chyla gave you this much we're gonna exclude how much Chyla gave you from our calculation and if we excluded Chyla, are you still at that 33 And a third percentage? Does that make sense? Let me know. And so that is where that information is coming from.
That is why it's important to keep good donor records. That is part of why your tax preparer is asking you for that information is because it will factor into these calculations about your public support percentages, and who is truly supporting you. That's the big piece of that, that I wanted to talk about that 33 And a third percent, because that's where a lot of organizations are like, Oh, I don't know how we're gonna do on that. I'm like, it's probably gonna be fine.
What some things I do want to point out there is the option that if you don't meet that 33 And a third there, it's called a facts and circumstances test. And again, sometimes you might fall below that percentage for whatever reason, is your organization still existing for the benefit of the public? So even if you're not being publicly funded? Are you still saying we are here to support this cause we are here to support literacy and kindergarteners in this zip code, and not necessarily literacy for kindergarteners on this street in this intersection where there's only one house.
So again, is the general public benefiting or is it just these three people benefiting? So that is where I would want you to make sure that you are going to be qualifying for these items. And that's it. That is it for the Schedule A. If there's something that you're like, Oh, I see this on our schedule, and I'd love to know more. Let me know send me a message, maybe we'll do a video on it as opposed to a podcast episode depending on when you send me the message. Alright, have a great day. Once again, this has been another episode of The Nonprofit Ace Podcast. Be sure to subscribe, wherever you're listening. I personally like Castbox just because of their search feature. And leave us a review. I'd love to know what are some topics that you'd like to hear more of.
Mentioned Past Episodes: