The Value of a Well-Prepared 990

Also read Joshua Drake’s related post What Form 990 Does my Nonprofit Need to File?

For tax-exempt organizations, a tax return is far more than just an annual filing requirement. It serves as a crucial tool for demonstrating transparency, financial stewardship, and governance practices.

Whether your organization files a Form 990, Form 990-EZ, or Form 990-PF, a well-prepared tax return can help nonprofits maintain compliance, engage donors, and foster organizational growth.

For purposes of this article, I will group all these informational returns under the general term “990.”

Why the 990 Matters

The 990 serves as both a regulatory tool and an opportunity for nonprofits to showcase their work. It provides the IRS and the public with insight into an organization’s finances, operations, and governance. Because the 990 is a public document, anyone — members, donors, journalists, and potential partners — can access it, typically through the organization’s website or platforms like the IRS and GuideStar.

Key Areas to Highlight

Nonprofits should focus on the key areas that ensure compliance and provide a comprehensive view of their organization’s activities and finances.

1. Program Activities: Communicating Impact

One of the most important sections of the 990 is the program activities section. This is an opportunity for nonprofits to explain how they are fulfilling their mission. It’s not enough to list programs; organizations should include narratives that demonstrate the impact of these programs.

By sharing measurable outcomes such as the number of individuals served, key initiatives completed, or changes made within the community, nonprofits can show how their programs advance their mission.

2. Governance and Internal Controls: Demonstrating Accountability

The 990 also provides transparency about an organization’s governance. This section asks for details on the board’s independence, the policies in place to manage conflicts of interest, and how decisions are made. A strong governance structure signals that the organization is managed responsibly, which builds trust with members and donors.

3. Functional Expense Allocation: Financial Stewardship

A critical part of the 990 is the functional expense allocation, which shows how the nonprofit spends its resources. Expenses are broken down into program activities, management and administrative costs, and fundraising. Properly allocating expenses ensures that an organization isn’t over-reporting program expenses to appear more efficient than it is.

4. Financial Performance: Showing Stability and Responsibility

The 990 requires nonprofits to report their financial performance, including revenue, expenses, assets, liabilities, and changes in net assets. The review of this financial data enables potential donors, members, and partners to assess an organization’s financial health.

5. Executive Compensation: Ensuring Transparency

The IRS requires nonprofits to disclose the compensation of certain key executives, including the CEO, CFO, and those earning above specific thresholds. This section ensures that compensation is fair, reasonable, and aligned with the organization’s mission and resources.

Nonprofits should be transparent about how they make compensation decisions. Clearly documenting this process reinforces trust and demonstrates that the organization is operating in an accountable and ethical manner.

Leveraging the 990 for Strategic Success

By preparing a thorough and thoughtful 990, organizations can enhance their public image, foster trust with stakeholders, and demonstrate their commitment to serving their mission and community.

Please contact the 990 team at KT if you would like our assistance in preparing your nonprofit tax return.

January 15, 2025

Charity Raffles – Tread Carefully

Raffles can be a fun and effective way for non-profit organizations to engage the public and raise funds to support the organization’s mission. However, from the perspective of the non-profit, there are legal considerations that must be kept in mind when conducting gaming activities in South Dakota.

Federal Rules

From a federal compliance standpoint, non-profit organizations must be mindful of the Internal Revenue Service’s (IRS) reporting and withholding requirements.

The prizes are taxable income to the winners, so the non-profit must ensure it properly reports the raffle prizes to the IRS. Generally, raffle prizes must be reported on Form W-2G with a copy to the winner if:

  1. The amount paid, reduced by the amount the person paid for the chance to win a prize, is $600 or more; and,
  2. The payout is at least 300 times the amount the person paid for the chance to win a prize.

Additional considerations are needed for larger prize winnings. If the fair-market-value of winnings totals more than $5,000, the non-profit is required to withhold and submit to the IRS 25% of the winnings. If the winner fails to supply a taxpayer identification number, then the non-profit must withhold 28% or 33% of the total proceeds, depending on who pays the withholding tax.

Form W-2G must be issued to the winner by January 31 following the year end of the organization. The organization must use Form 945 to report and send withheld amounts to the IRS.

State Rules

Many states and localities regulate gaming activities. From a South Dakota compliance standpoint, if raffle tickets are sold statewide, written notice of the activity should be submitted to the Secretary of State prior to selling any tickets. Locally, the Rapid City Municipal Code states 30 days’ written notice of intent must be filed with the City Attorney.

What can donors deduct?

Charity raffle donors may be surprised to learn that their “contribution” is not deductible. Those who play the game are expecting (hoping) to win something in return, so the money exchanged is considered a purchase/sale of goods, whereas a charitable donation is a voluntary gift to the non-profit with no expectation of receiving anything tangible in return.

Raffles give the public the opportunity to contribute money to a great cause while enjoying the chance to win prizes, whether it be a cash prize or otherwise. Non-profits should not feel discouraged from conducting raffles which could result in meaningful income to further their mission, but rather empowered to conduct such activities while complying with regulations.

Please contact KT if you would like our assistance in understanding the implications of your organization’s raffle activities.

October 5, 2023