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.
