While tax-exempt nonprofit organizations do not pay federal taxes (that is what “tax-exempt” means), most do have to file an annual informational return with the IRS called the Form 990.
The IRS Form 990 allows the IRS and the general public to evaluate a nonprofit’s operations; it includes information on the nonprofit’s mission, programs, and finances.
Terms Found on IRS Form 990 & IRS Form 990 EZ
Since the IRS Form 990 is due for many organizations on May 15, we have had many inquiries lately on completing the form. We have provided a cursory list of terms you will find on IRS form 990 and 990EZ.
- Contract revenue. Payment made to a tax-exempt organization for which the payor personally receives a service or product. Contract revenue is the money earned in a fee for service scenario.
- Contribution. A contribution is any payment (or portion of a payment) made by a donor to an organization for which the donor does not receive full fair market value from the organization.
- Direct Public Support. The gross amount of contributions and grants the organization received from members of the public are encompassed by the term “direct public support.”
- Dues. Payments made by the organization’s members in exchange for services and other membership benefits are “dues.” The value of the dues paid should be equivalent to the value of the services received.
- Fundraising. Overhead incurred during solicitation of contributions, grants, or other payments are considered “fundraising” expenses. Special events, distribution of fundraising material, and soliciting funding from various other sources are included in these costs.
- Grant. A grant is a payment by a donor (i.e. grantor) that aids the organization (i.e. grantee) to provide programming in furtherance of its tax-exempt purposes. Public charities, private foundations, government agencies, trusts, and other exempt organizations are common providers of grants. Whether a grant is direct or indirect depends on the tax status of the grantor.
- Indirect Public Support. When one tax exempt organization receives donations from the public and gives money to another tax exempt organization “indirect public support” occurs. There are a few different ways that an organization may receive indirect public support. One way is through a supporting organization whose purpose is to garner donations and perform fundraising in furtherance of an organization with similar tax exempt purposes and related activities. Indirect funding may also come from federated fundraising agencies such as United Way or from organizations that receive public donations.
- Primary Purpose. To determine if continued tax exempt status is appropriate the IRS applies the “primary purpose” test. It asks whether an exempt organization operates primarily in furtherance of its exempt purposes. This test is most commonly applied to charitable organizations.
- Program Services. Also known as exempt functions, program services are the activities that the organization was created to perform and which form the basis of the tax exempt status. Income generated by program services is tax exempt.
- Program Service Accomplishments. This phrase encompasses information regarding what program services have achieved or accomplished. Your organization should objectively outline its accomplishments in this section.
- Special Event. Special events are usually put on by charitable organizations for fundraising purposes. As noted above, special events may be included in fundraising costs. That being said, not all of the revenue generated from special events is contributions. Part of the revenue may be payment for goods and services (for example, dinner). If a donor purchases a ticket for a special event for $100 and the fair market value of the dinner is $40 then the amount of the contribution is $60.
- Unrelated Business Income. Income created by an organization from a business that is regularly carried on and is not substantially related to furtherance of the tax exempt purposes is “unrelated business income.” This type of income is not exempt from taxation. Even if revenue from unrelated business is used to fund an exempt activity, it is taxable if considered “unrelated.” For example, income from a hyperlink on an organization’s website that provides additional education or information may be related to the exempt purpose and therefore tax exempt; but income from a hyperlink which advertises another service may not be related, and may be taxable. Learn more about Unrelated Business Income and Unrelated Business Income Tax.
Open to the Public
Nonprofits are required to make returns available for viewing by the public. Therefore it is important that any return filed fully responds to all IRS inquiries and clearly articulates the organization’s purposes, activities, and program service accomplishments. Organizations preparing a return should seek advice from tax professionals or attorneys should questions arise.
