Important Changes to Note on New (2005) Form 990

By Joyce Underwood, CPA
Senior Manager, Nonprofit Tax Services

For the first time in many years the IRS has made significant changes to the Form 990. Of these changes several have generated much discussion. The areas most often asked about by our clients and colleagues include:

1. The previous Part V-List of Officers, Directors, Trustees, and Key Employees is now Part V-A. New questions were added to this section concerning relationships with other entities and control of the organization that require additional disclosures about relationships and control.
   
   If you are puzzling over the new disclosure requirements for 2005 Form 990, line 75b, IRS has suggested organizations look to the instructions for Part IV, line 51 - Other Notes and Loans Receivable for the definition of relationships:

   . . . Family relationships includes an individual's spouse, ancestors, children, grandchildren, great-grandchildren, siblings (whether by whole or half blood), and the spouses of children, grandchildren, great-grandchildren, and siblings. Business relationships are employment and contractual relationships, and common ownership of a business where any officers, directors, or trustees, individually or together, possess more than a 35% ownership interest in common. Ownership means voting power in a corporation, profits interest in a partnership, or beneficial interest in a trust.

   IRS has not provided further guidance in this area, and probably will not until next year.

2. New Part V-B has been added to Form 990. It requests information about compensation or other benefits that former officers, directors, trustees, and key employees received from the organization. IRS has indicated that "former" has no time limit, so any person ever having a key position with the organization currently receiving compensation or having loans must be disclosed here. Note, however, that any key person that was an officer, director, etc. at any time during the fiscal year being reported on should remain on the "current" list in Part V-A.
3. Form 990, Schedule A-Part IV-Reason for Non-Private Foundation Status has been revised to require supporting organizations that check the box for line 13 to indicate the type of supporting organization they are under Section 509(a)(3), Type I, II or III. This is the first time, outside of the exemption application process, that IRS has asked that an organization disclose its type of classification as supporting organization. If unsure, organizations will need to look to their organizing documents and current activities as well as consult with their tax advisors and/or counsel to determine which classification suits their organization and should be aware IRS is closely scrutinizing Type III supporting organizations, and current legislation can have a significant impact on support (new rules make it difficult for private foundations to make grants to Type III organizations.)
• Type I supporting organizations are "operated, supervised, or controlled by" the supported organization.
• Type II supporting organizations are "supervised or controlled in connection with" the supported organization.
• Type III supporting organizations are "operated in connection with" the supported organization. Since Type III relationships are less formal than a Type I or Type II relationship, Type III organizations must meet a responsiveness test and an integral part test. Section 1.509(a)-4(i)(2) and (3) of the Income Tax Regulations. These tests are designed to ensure that the supporting organization is responsive to needs of a public charity and that the public charity oversees the operations of the supporting organization

Other changes to note:

• Reporting foreign activity: IRS has added new checkboxes for foreign grants in Part II-Statement of Functional Expenses and Part III-Statement of Program Service Accomplishments. Additionally, in Part VI, new line 91b has been added which asks whether the organization had an interest in or signature authority over any foreign financial accounts, and if so, to list the countries where the accounts are located. New line 91c has been added which asks whether organizations have offices in foreign countries and if so, to list the countries where the offices are located.
• Form 990, Schedule A-Part II-Compensation of the Five Highest paid Independent Contactors has been spit into Parts II-A and II-B. The new Part II-B requires information about contractors for other (non professional) services.
• Form 990, Schedule A-Part III-Statement of Activities has added a question regarding contributions of qualified real property under 1709(h), qualified conservation property.

As noted in the article on the Pension Protection Act of 2006, you should also note that there are new rules for supporting organizations; nonprofits that receive rent, interest, royalty or annuity payments from controlled entities must report this on form 990, along with amounts of loans and transfers to the controlled entity, in a separate statement; and Form 990-T is open for public inspection for 501(c)(3) organizations. (Effective 8/17/06.)

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