Information You Will Need to Prepare Schedule D
You will need to gather or prepare the following information:

• Details regarding your donor advised funds, (Part I).
• Details regarding your conservation easements, (Part II).
• Details regarding your collections of art, historical treasures, and similar assets, (Part III).
• Details regarding your trust, escrow, and custodial arrangements, (Part IV).
• Details regarding your endowment funds, (Part V).
• Details regarding your assets, investments, and liabilities, (Part VI, VII, VIII, IX, and X).
• Your audited financial statements, (Part XI, XII, and XIII).
• View the IRS Website for additional instructions for preparation of Schedule D.

How to Prepare Schedule D

Part I, Organizations Maintaining Donor Advised Funds or Other Similar Funds or Accounts

A donor advised funds allow donors to maintain advisory privileges regarding the distribution or investment of their donated funds. Generally a donor advised fund is a fund or account:

1. That is separately identified by reference to contributions of the donor;
2. That is owned and controlled by your organization; and
3. For which the donor or donor advisor has or reasonably expects to have advisory privileges in the distribution or investment of amounts held in the donor advised funds of accounts because of the donor’s status as a donor.

A donor advised fund does not include any fund or accounts:

1. That only makes distributions to a single organization or governmental unit;
2. In which the donor only provides advice regarding the distribution of grants to individuals on an objective basis for travel, study, or other similar purposes as the member of a committee which is not controlled by the donor.

Line 1 – 6: complete the information for your donor advised funds in column (a) and for you funds that are similar to donor advised funds in column (b).

Part II, Conservation Easements
Line 1: Conservation easements restrict the use of or modifications to real property. They must be granted to a qualified organization in perpetuity exclusively for conservation, such as protection of a habitat, preservation of open space, or the preservation of property for educational, historical, or recreational purposes. To qualify as a certified historic structure, the building must be listed in National Register of Historic Places or be certified as being of historic significance to a registered historic district.

Line 2a – 2d: These numbers should be exact, not estimates, using decimals where necessary, such as for acreage.

Line 3: Because conservations easements are supposed to be granted in perpetuity, the IRS wants to know about any changes. An easement is modified if the terms of the easement are modified, such as increasing or decreasing the amount of land included in the easement. An easement is terminated if it is condemned, extinguished by court order, transferred, or rendered void or unenforceable. If the easement was modified, transferred, or terminated during the year, provide an explanation in Part XIV.

Line 5: Briefly summarize in Part XIV any written policies regarding monitoring, inspection, and enforcement. Monitoring occurs when you investigate the condition or use of the restricted property to verify that the owner is adhering to the terms of the easement. Inspection refers to an onsite visit to the property, while enforcement is an action taken by your organization when a violation of the easement stipulations occurs. This may include communicating with the property owner regarding their obligations under the easement, arbitration, or litigation.

Line 8: In order to comply with IRC Sections 170(h)(4)(B)(i) and 170(h)(4)(B)(ii), the easements must meet the following requirements:

1. Restrictions that preserve the entire exterior of a building, (including the space above it) and prohibit any changes to the exterior that are inconsistent with the historical character.
2. Donor and donee agree in writing under penalties of perjury that the donee’s exempt purpose is environmental protection, land conservation, open space preservation, or historic preservation and the donee has the resources and commitment to enforce the restrictions.
3. There is a qualified appraisal, photographs of the entire building exterior, and a description of all development restrictions relating to it, (such as zoning laws, restrictive covenants, etc.)

Part V, Endowment Funds
Section V is a snap shot of the components of your net assets. Quasi-endowments, (board designated) are established by the board to function as endowments. They must retain their purpose and intent as specified by the donor or source of the original funds. Permanent endowments provide a permanent source of income. The principal must be invested and kept intact in perpetuity. The income can be used by your organization. Term endowments provide a source of income for a specific period of time or until a specific event occurs.

Line 1a: Enter the total sum of your quasi, permanent, and term endowments.

Line 1b: Enter the current year contributions to the endowments. Include gifts, grants, and contributions. Also include additional funds established by your board to function like an endowment, but that may be expended at any time at the discretion of the board.

Line 1c: Enter realized and unrealized gains and losses. If earnings are reported net of transaction costs, enter the net on this line. If earnings are reported gross, enter the transaction costs on line 1f.

Line 1e: Enter distributions for facilities and programs, including amounts withdrawn from quasi-endowments. Do not include scholarships on this line. Instead enter them on line 1d.

For more information, view the IRS instructions at http://www.irs.gov/pub/irs-pdf/i990sd.pdf.

Coming Soon
Schedule G coming March, 2010.

Special Issues
Financial information in Parts II and III are now reported on the same basis as the remainder of the return, (in the past, Schedule A was presented on a cash basis even if the rest of the return was on an accrual basis.) This means that all four prior years that are shown (2004 through 2007) must be revised to the accrual basis if your organization reports on an accrual basis. Additionally, you must convert the list of supporters that is reported on line 5 to accrual basis for all prior years (2004 through 2007).

Information You Will Need to Prepare Schedule A, Part II or III
You will need to gather the following information:

• Contribution lists for 2004 – 2008. After 2008, you will only need your current year list since prior years will already have been converted to the accrual basis.
• Tax returns for 2004 – 2008. After 2008, you will only need your current year return since prior years will already have been converted to the accrual basis.
• View the IRS Form 990 Filing Tips: Schedule A (Public Support and Public Charity Classification) for additional help.

How to Prepare Schedule A, Part II
Complete Part II if you selected line 7 in Schedule A, Part I. There are two ways to meet the public support requirements: at least 33 and 1/3% of your support is from contributions and grants or 10% of your support is from contributions and grants and you meet the facts and circumstances test listed in Regulations section 1.170A-9T(f)(3). If you met the support test in the prior year but don’t meet it this year, you will have a grace period for one year, (see lines 16b and 17b in Schedule A). This article will only address the lines that often cause confusion.

Line 1
Enter your contributions, grants, and membership fees to the extent the fees are in excess of payments to purchase related activity products or services. You will find these numbers on Form 990 page 9 line 1. For 2004 – 2007, this number would come from Page 1 line 1. Remove unusual grants from this amount. Unusual grants are grants that are contributions and bequests from disinterested persons that meet the following criteria:

• Attracted because of the organization’s publicly supported nature,
• Unusual and unexpected because of the amount, and
• Large enough to endanger the organization’s status as normally meeting the 33% percent public support test or the 10% facts and circumstances test.

Line 5
Enter the portion of contributions by each individual , trust, or corporation included on line 1 that exceeds 2% of the total reported in line 1(f). This is for the current year plus the four previous years. For example, If your total in line 1(f) is $1,000,000, and you have one individual who contributed $21,000 during years 2004 – 2008, a private foundation who contributed $100,000 during years 2004 – 2008, a corporation that contributed $50,000 during the years 2004 -2008, and 50 individuals who each contributed a total of less than $20,000 during 2004 – 2008, you would report $171,000, (21000 + 50,000 + 100,000) on line 5. The $171,000 would be considered as coming from excess contributors and will be removed from your public support percentage calculations. Do not include support from governmental units or publicly supported organizations in line 5. Remember to convert 2004 – 2007 to accrual basis if your organization is on an accrual basis.

Line 12
Enter the total amount of gross receipts for the current year plus the previous four years from admissions, sales of merchandise, performance of services, or furnishing of facilities in any activity which is not an unrelated trade or business. Include membership fees to the extent that they are payments to purchase any of the related activities.

Line 17a
If lines 14 and 15 are less than 33 1/3% you will need to determine if you qualify under the facts and circumstances test. If 10% of your support is from contributions and grants and you meet the facts and circumstances shown below, select the box on line 17a and provide details of how you meet the following facts and circumstances requirements of Regulations section 1.170A-9T(f)(3) in Schedule A, Part IV):

• The program maintains a continuous and bona fide program for solicitation of funds from the general public, community, membership group involved, governmental units or other public charities.
• All other facts and circumstances, including the sources of support, whether the organization has a governing board which represents the broad interests of the public, and whether the organization generally provides facilities or services directly for the benefit of the general public on a continuing basis.
• If the organization is a membership organization, whether the solicitation for dues-paying members is designed to enroll a substantial number of persons from the community, whether dues for individual members have been fixed at rates designed to make membership available to a broad cross-section of the public and whether the activities of the organization will be likely to appeal to persons having some broad common interest or purpose.

Schedule A Part III
Complete Part III if you selected line 9 in Schedule A, Part I. The public support for test Part III is met if the organization meets the following criteria:

• The organization receives at least one-third of its support from contributions, membership fees, and gross receipts from activities related to its exempt functions or from amounts which are not related trades or business, not including unusual grants, (see above for a definition),
• No more than one-third of its support comes from gross investment income and net unrelated business income from businesses acquired after June 30, 1975.

If this criteria is not met, the organization will fail the public support test and will be considered a private foundation instead. Contributions from disqualified persons, contributions that exceed 1% of the total contributions for the year, and contributions that exceed $5,000 are removed from the public support calculation.

For more information, view the IRS instructions at http://www.irs.gov/pub/irs-pdf/i990sa.pdf.

Coming Soon
Schedule D coming February, 2010

Special Issues With Schedule A, Part I
While your IRS determination letter is the first place to look to determine that type of organization you are, your activities may have changed. For your first five tax years as a section 501(c)(3) organization, you must check the box in Part I that corresponds to your public charity status as stated in your exemption determination letter from the IRS. After the first five years, check the box that corresponds to the activity you currently have.

Information You Will Need to Prepare Schedule A, Part I
You will need to gather or prepare the following information:

• IRS exemption determination letter. If you do not have your exemption determination letter, call 1-877-829-5500 to speak to the Exempt Organizations Customer Account Services.
• Information regarding the sources of your income.
• View the IRS Form 990 Filing Tips: Schedule A (Public Support and Public Charity Classification) for additional help.

How to Prepare Schedule A, Part I
Complete Part I by specifying under which part of the Internal Revenue Code (IRC) your organization claims classification as tax-exempt. Look at your determination letter to determine under what section the IRS has determined you fall, then verify that you still meet the qualifications of the section, as detailed on the schedule and shown below. The remainder of this article will only address lines 7, 9, and 11 as they can be a little confusing.

Line 7 — 509(a)(1)
An organization that checks the box on line 7 qualifies as tax-exempt under IRC 509(a)(1) and 170(b)(1)(A)(vi) indicating that it is a “publicly-supported public charity”. This means that a substantial part of your revenue comes from contributions from the general public or from a governmental unit. A publicly-supported charity must attract public support in the form of donations and grants from people and granting agencies who agree with its goals and that it is successfully achieving them. If you are described in IRC 509(a)(1) and 170(b)(1)(A)(vi), you will complete Part II of Schedule A.

Line 9 — 509(a)(2)
An organization that checks the box on line 9 qualifies as tax-exempt under IRC 509(a)(2) and is typically supported by revenue from its exempt-purpose activities and services rather than from contributions. A 509(a)(2) organization, which depends more on revenue from services provided to those who find the services valuable and cost-effective, must in addition avoid competing with commercial businesses or risk being reclassified as a commercial business itself. In general, 509(a)(2) organizations are at greater risk of losing their tax-exempt status as a result of being reclassified as a commercial (and not charitable) organization. To prevent this, restrict your activities to ones that primarily advance your stated missions. If you are described in IRC 509(a)(2), you will complete Part III of Schedule A.

Line 11 — 509(a)(3), Supporting Organizations
Supporting organizations will select what type of supporting organization they are in line 11. Again, look at your IRS determination letter as a first place to start. If this does not tell you your type, answer the following:

• Type I:  the organization is operated, supervised or controlled by one or more publicly supported organization. Choose this if you can answer “Yes” to this question: 
  “Does the governing body, officers ,or membership of the supported public charity(ies) select a majority of your organization’s officers, directors, or trustees?”
• Type II: the organization is supervised or controlled in connection with one or more publicly supported organizations. Choose this if you can answer “Yes” to this question: 
  “Do the same persons, such as directors, trustees, and officers supervise or control the supported organization and my organization?”
• Type III: choose this is you answered “No” to the questions for Type I and Type II, your activities perform the functions of, or carry out the purposes of, the publicly supported organization(s), and but for your organization’s involvement, such activities would normally be engaged in by the publicly supported organizations themselves.  If this is the case, choose Type III Functionally Integrated. If not, you must (1) make payments of substantially all of your income (at least 85% of adjusted net income) to or for the use of one or more supported organizations, (2) provide enough support to one or more supported organizations to ensure that the supported organization is attentive to your operations; and (3) pay a substantial amount of the total support of the supporting organization to those supported organizations that meet requirements (1) and (2). If this describes you, choose Type III, Other.

NOTE: The IRS has published a notice of proposed regulations for Type III Supporting Organizations That Are Not Functionally Integrated as a result of changes made in the Pension Protection Act of 2006, Public Law 109-280 (PPA). As a result of the PPA, Type III Supporting Organizations are prohibited from supporting any supported organization not organized in the United States. It also prohibits Type I or Type III supporting organizations form accepting a gift or contribution from a person who directly or indirectly controls the governing body of a supported organization.

For more information, view the IRS instructions at http://www.irs.gov/pub/irs-pdf/i990sa.pdf.

Coming Soon
Schedule A, Parts II and III, coming in January, 2010.

1. Parent – an organization that controls the filing organization.
2. Subsidiary – an organization controlled by the filing organization.
3. Brother/Sister – an organization controlled by the same person or persons that control the filing organization.
4. Supporting/ Supported – an organization that is (or claims to be) at any time during the organization’s tax year, a supporting or supported organization within the meaning of section 509(a)(3) and 509(f)(3).

According to the IRS – the definition of control is:

1. Power to remove and replace a majority of a nonprofit organization’s directors or trustees,
   or
2. Management or board overlap where a majority of the controlled entity’s directors or trustees are trustees, directors, officers, employees, or agents of the controlling organization.

In the case of stock corporations, and other organizations with owners or persons having beneficial interests, whether such organization is taxable or tax-exempt, any of the following relationships represent control:

1. Ownership of more than 50% of the stock (by voting power or value) of a corporation.
2. Ownership of more than 50% of the profits or capital interest in a partnership.
3. Ownership of more than 50% of the profits or capital in a limited liability company (LLC ) treated as a partnership regardless of the designation under state law of the ownership interests as stock, membership shares or otherwise.
4. Being a managing partner or managing member in a partnership or LLC treated as a partnership which has three or fewer managing partners or managing members (regardless of which partner or member has the most actual control).
5. Being the sole member of a disregarded entity, (an entity wholly owned by the organization that is not a separate entity for Federal tax purposes).
6. Ownership of more than 50% of the beneficial interests in a trust.

What is considered indirect control? If the filing organization controls Entity A, which in turn controls Entity B, the filing organization will be treated as controlling Entity B also.

Sometimes it is difficult to determine “who” owns “what”. If you have questions, call us.

Sen. Chuck Grassley (R-IA), ranking member of the Senate Finance Committee, has filed two amendments to the health care reform bill introduced by Senate Finance Chairman Max Baucus (D-MT) that directly impact tax-exempt organizations. These amendments were filed along with more than 500 others before the end of last week, and are being considered in the markup of the Baucus bill that got underway Sept. 22.

One of Grassley’s amendments would give the IRS statutory authority to require that tax-exempt organizations report governance and management information as part of their annual Form 990 reporting requirements. The IRS revised the Form 990 for the 2008 tax year to include a new section on governance, among other changes. The section asks filing organizations questions about board composition, governing body review of the 990, and whether certain policies are in place for conflicts of interest, whistleblower and document retention, as well as a process for determining executive compensation. In drafting the new section, the IRS acknowledged it lacked explicit statutory authority to scrutinize nonprofit governance practices, but included the section because it believes good governance leads to improved compliance.

Grassley’s amendment would protect the IRS from “wasteful” legal challenges by adding language to specifically mandate that the agency require governance reporting by tax-exempt organizations.

The second amendment proposed by Grassley is a revenue raiser that would remove the safe harbor providing tax-exempt organizations a “rebuttable presumption of reasonableness” in setting the compensation of its officers and directors. In explaining the amendment, Grassley cited studies by the IRS of executive compensation practices at charities and nonprofit hospitals. These studies showed very high salaries and little recourse for the government to challenge the reasonableness of compensation paid by the organizations in question. Many organizations were able to use rebuttable presumption procedures to demonstrate compensation was set comparable to executives in other organizations, even in some instances for-profit organizations.

Grassley’s amendment would adopt a 2005 recommendation by the Joint Committee on Taxation to remove the rebuttable presumption defense and require organizations to disclose in their annual 990 filings a summary of the comparable information used to determine an executive’s compensation. In a report this week, BNA quoted a Grassley spokesperson as saying the changes to existing compensation rules would apply only to Section 501(c)(3) and (c)(4) organizations.

ASAE is attempting to determine the intent of this amendment, and analyze its implications for tax-exempt organizations. Giving the IRS express authority to determine what is reasonable compensation and what are appropriate comparables would be viewed by many as a potentially dangerous extension of authority. ASAE will study this amendment closely, and report its findings.

Christi Stinson is a member of ASAE and Executive Director of the Funding Information Center in Fort Worth. The above was reprinted with permission from ASAE.

Public Charities (excluding certain religious, gov’t and political organizations) are requied to file a Form 990, and if your have:

1. Gross receipts greater than $1,000,000 and assets greater than $2,500,000 your organization should complete Form 990.

2. Gross receipts greater than $25,000 and less than $1,000,000 and assets less than $2,500,000 should complete Form 990EZ.

3. Gross receipts less than $25,000 should complete Form 990-N.

Private foundations file Form 990-PF.  Forms 990 and 990-PF are due within 41/2 months after your organization’s year-end (May 15 if your year-end is December 31). Extensions may be filed using Form 8868.

If you fail to file the return on time, the penalties for the 990 are $20/day to a maximum of $10,000 or 5% of gross receipts. The penalities for a 990-PF are $20/day to a maximum of $10,000 (small org) or $50,000 (large org) or 5% of gross receipts.

So…be ready to file or extend as the due date approaches.

The redesigned 990 consists of an 11-part core form required for all organizations that file a 990, with several additional schedules to be completed based on certain requirements.  Some of the most significant changes to the new 990 are the required disclosures related to governance and compensation of officers, directors and key employees.

Because of the new reporting requirements, many organizations will need to reevaluate their overall governance policies and procedures, as well as the composition and responsibilities of the board of directors.  In some cases these changes will be significant and will require considerable time and resources to implement. 

Through the revised form, the IRS is effectively imposing a new standard of governance on nonprofit organizations.  Don’t wait until it’s time to file your 990 to consider how these changes will affect your organization. For more information see the IRS website and one of our previous posts.

• Type of investments being made
• Distributions being made

Because they do not have the public support base, private foundations rely on either a minimal number of significant contributors or returns from investments for their income base. Most are considered to be “grant-making” organizations as they do not have any operations. The potential for abuse lies in the ability to direct the types of investments and/or distribute income either back to the contributors, who are usually board members or the original founders, or to non-exempt purposes that can benefit the contributors.

Extra reporting requirements include a detailed list of every investment owned by the organization. Every stock, every mutual fund, every partnership, S-corp, and LLC interest- ooh, did I say LLC? Yep. Certain transactions with flow through entities are considered “Listed Transactions”- assumed to be tax avoidance strategies- and others are being heavily scrutinized. In addition, they are not permitted to hold more than 20% interest in an unrelated business enterprise.

The other difference lies in the distributions. Besides keeping a keen eye out for anything that might possibly benefit a board member or significant contributor, it is imperative the organization make minimum charitable distributions roughly equal to 5% of the fair market value of investments. All distributions made must be detailed on the return with full name and address.

Do you need help in determining “what” should be reported “where” on your 990-PF? Contact us.

Question…What is a whistleblower?

According to www.dictionary.com - a person who informs on another or makes public disclosure of corruption or wrongdoing. One famous whistleblower is Jeffrey Wigand, who exposed the Big Tobacco scandal, revealing that executives of the companies knew that cigarettes were addictive and approved the addition of carcinogenic ingredients to the cigarettes. Wigand’s story was the basis for the 1999 movie The Insider.

So why is the IRS interested in tax-exempt organizations having a whistleblower policy? This type of corporate policy encourages staff and volunteers to come forward with credible information on illegal practices or violations of adopted policies of the organization. The policy specifies that the organization will protect the individual from retaliation, and identifies the staff, board members or outside parties to whom such information can be reported.

Does your organization have a whistleblower policy? Google for various “free samples” or call me.

Why is this important to an organization? Maintaining formal documents and records requires space, however these documents substantiate transactions and decisions of organization. Some documents should be retained for the life of the organization and some should be discarded in the short-term.

What should be kept and for how long should be included in the organization’s Retention/Destruction policy. The policy should identify the record retention responsibilities of staff, volunteers, board members and outsiders for maintaining and documenting the storage and destruction of the organization’s documents and records.

For additional information from the IRS, see this article.