Purpose of Schedule D
Schedule D is designed to provide additional information regarding information presented in the financial statements of Form 990.

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.

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Purpose of Schedule A, Parts II & III
The purpose of Part II is to determine whether your organization meets the public support test.

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.

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Purpose of Schedule A
The primary purpose of Schedule A is to assist the IRS in determining if an organization qualifies as tax-exempt.  Public accountability is also promoted by providing certain details of the organization’s finances and operations for public inspection. Only 501(c)(3) organizations and 4947(a)(1) nonexempt charitable trusts complete Schedule A.

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.

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When completing the new Form 990, organizations are required to provide details about related organizations on Schedule R. An organization is a related organization to the filing organization if it stands in one or more of the following relationships to the filing organization:

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.

Governance, as defined by Webster’s dictionary, comes from the noun word, government. Government, in it’s purest form, is a political function of policy making, distinguished from the administration of policy decisions.

Since the summer of 2004, tax-exempt entities have experienced continued pressure from regulatory and legislative agencies. Consider the following important dates:

1. Spring 2005 – Panel on the Nonprofit Sector issues interim report on charitable reform measures.
2. June 2006 – IRS releases new Form 1023 with new governance questions.
3. August 2006 – Pension Protection Act of 2006 signed into law.
4. February 2007 – IRS publishes a discussion draft of good governance policies
5. Fall 2007 – Commissioner of Exempt Organizations begins giving speeches on governance issues.
6. December 2007 – Redesigned 990 released.
7. December 2008 – Form 990 (core form and related schedules) finalyzed.
8. 2009 – IRS pledges to release a checklist for its agents to use during audits to determine how governance relates to tax compliance.

Why is the IRS interested in governance? The first and prominent answer, according to Steven T. Miller, IRS Comission, Tax Exempt and Government Entities,  a well-governed organization is more likely to be compliant with the tax law, while poor governance can easily lead to trouble. Good governance also allows organizations to self-identify and self-resolve problems. Governance practices influence whether an organization is operated to further exempt purposes, and whether the organization serves public, rather than private, interests.  Good or bad governance dictates whether the organization’s executives are compensated fairly or excessively. It influences whether the organization makes informed and fair decisions regarding its investments or its fundraising practices, or whether it allows others to take unfair advantage.

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In redesigning Form 990 for tax exempt organizations, the IRS has over and over again called for transparency in the industry.  In fact, in a background paper summarizing the redesign process, the IRS said the 990 is “the key transparency tool relied on by the public, state regulators, the media, researchers, and policymakers to obtain information about the tax exempt sector and individual organizations.”

So what exactly is transparency?  It’s just honest communication, right?  Not so fast.

Chris Freeland, who is a pastor at McKinney Memorial Bible Church, wrote in his blog about the difference between honesty and transparency.

“Honesty” means I choose the topic, and speak honestly about it. . . “Transparency” involves honesty, but the two words aren’t synonymous.  Transparency is more than pervasive honesty; it’s open and honest about everything.

That’s the standard the IRS has called for, and it’s a high standard to achieve.  But don’t the communities served by nonprofit organizations and the people who support them deserve that kind of accountability?