How to Read the IRS Form 990 & Find Out What it Means

2005 Form 990 Version

Written by Peter Swords, former Executive Director of the Nonprofit Coordinating Committee of New York, with the assistance of Victoria Bjorklund of Simpson Thacher & Bartlett and Jon Small, Executive Director of NPCC; supported by a grant from the Ford Foundation.

May, 2011: A new version of this paper is available at www.npccny.org/new990/new990.htm.

Introduction

There is information in the Form 990 that you may find interesting and helpful for learning about the nonprofit organization that filed the Form 990. But you need to know where to find this information and how to interpret it. To help you do this, we offer a list of the ten most significant pieces of information that can be found in the Form 990 and show you exactly where you can find the information.

Of course, your particular interest in the organization whose Form 990 you are reviewing will influence what information you may consider significant. For example, if you are thinking of contributing to a nonprofit, you may want to know what it does and how strong it is financially (its ability to attract resources, its level of reserves, etc.). If you are a board member, you may be interested in reviewing your own nonprofit’s Form 990 for information that might prove embarrassing upon inspection by the public. Some believe that board members have a responsibility to review their organization’s Form 990 before it is filed.

Immediately below we list the ten most important items we address along with where they can be found on the Form 990. You can go directly to any particular item by clicking on its line. (In some cases an item refers to more than one part of the Form 990. We indicate just the most important part below.)

At the top of page 1 of the Form 990 there is a section of about seven lines that elicits the name of the filing organization and certain other information.

<img src="http://npccny.pi.bypronto.com/2/wp-content/uploads/sites/2/2016/02/1.gif" alt="IRS Form 990 - Identity and Tax Status" class="img-responsive aligncenter img-thumbnail"

Item A shows whether the filer is on a calendar fiscal year or some other fiscal year. This can be important since generally a Form 990 must be filed five and a half months after the end of the filer’s fiscal year and as you review a form you may wish to know whether you have access to the most current form.

Item B elicits whether the filer has changed its address (discussed below) and whether the return is its initial or final return. If the return is a filer’s initial return, one will be on notice that it has a very short track record; if it is the final return one will be on notice that the filer is terminating operations.

Fundamental to your examination of a Form 990 is to make sure you are looking at the Form 990 that you set out to look at. By looking at the address information in the box (item C), you learn the name and address of the filer. As there may be more than one organization with the same name, you have to make sure you have the Form 990 of the organization you are interested in. There is usually only one organization with a particular name in a state, so the filer’s address may provide the assurance you need. If the filer has changed its address, it must check the first box under item B. If you still have doubts, item E reports the telephone number of the filer and a call to it will almost certainly clear the question up.

Item J shows what paragraph of section 501(c) the filer is exempt under. You may believe that the filer is exempt under section 501(c)(3) (the paragraph that exempts charitable, educational and religious organizations), when in fact it may be exempt under some other paragraph, such as section 501(c)(6) (which exempts trade associations). There are 27 paragraphs under subsection section 501(c), all indicating different types of organizations that are exempt under section 501(a). If you were considering making a contribution to the filer for whom you would expect to claim a charitable contribution deduction under section 170 of the Code, this information would be important to you, since, with few exceptions, only contributions to section 501(c)(3) organizations are eligible for the charitable-contribution deduction.

Sometimes one nonprofit will file a group return for itself and its affiliates. Item H provides information on this subject.

Item F indicates what accounting method the filer uses. In virtually every case it will either be the cash or accrual method. It will be important for you in interpreting a Form 990 to know what accounting method a filer used. For example, if a filer used the cash method, it will not include accounts receivable and other accrual items of income in Part I as income or accounts payable and other accrual items of expenses in Parts I and II as expenses, while these items would be included in income and expenses if the filer used the accrual method.

Regarding item M, filers who receive during the year $5,000 or more (in money or property) from any one contributor must attach Schedule B (Schedule of Contributors) to their Form 990. This schedule includes information as to the identity of such contributors and how much they gave. It is NOT open to the public and thus cannot be accessed. However, item M at the top of page 1 of the Form 990 asks the filer to check a box if it is not required to attach Schedule B. Thus, if the box is checked, it means that the filer received no contribution from any one contributor of $5,000 or more. This information may be considered relevant in understanding a filer's capacity to raise money from individuals.

(Check the Instructions for information on items D, F, K and L.)

Part I (Revenue, Expenses and Changes in Net Assets) on page 1 is divided into three sub-parts: “Revenue,” “Expenses,” and “Net Assets.” The Revenue sub-part reports a filer’s total revenue broken down among some 13 different sources (e.g., contributions, fees for services (called program service revenue on the Form 990), etc.). The sum of these lines is totaled at Line 12 (Total revenue) at the bottom of the Revenue subpart By going directly to Line 12, you can find out how much total income the filer received during the year. This will give you some idea of the size of the filer’s operation. This may be misleading since in a banner year a filer may have received a greater amount of income than it needed to defray expenses for that year, or, as we shall see below, it may have received income that is not attributable to the year. Thus, in many cases the dimension of a filer’s activities may be better reflected by considering its total expenses for the year. This amount can be found at Line 17 (Total expenses) in the Expenses subpart near the bottom of page 1. You might also look at Line 90b on page 5, which indicates how many employees the filer engages. Below is an example of Part I. We have highlighted Line 17.

Example 1

IRS Form 990 - Revenue, Expenses and Changes in Net Assets - Example 1

As a preliminary point, we believe a principal value of studying the financial information found in the Form 990 is to help you arrive at informed conclusions about the filer’s ability to garner financial support in the future and thus to be able to continue its operations. Part I contains much financial information that can help you with this effort.

Generally Line 12 may give you an overall idea of the level of the filer’s income generating potential for the year being reported on. If you have access to the filer’s Forms 990 for the past three years and you observe that for each year its Line 12 is about at the same level, you might conclude that it will be able to generate a similar amount in the immediately ensuing period. If the filer reports increasing amounts of revenue for the three years, you might conclude its ability to generate income is growing stronger. A contrary conclusion may be reached if its total revenue decreases across the three years. As noted in the Introduction, these possible interpretations may or may not be appropriate to the actual situation of a particular filer. You would need to know a great deal more about the filer’s circumstances to be able to draw firm conclusions.

Above we pointed out that the Revenue section of Part 1 is broken down among 11 different sources of income (e.g., contributions, fees for services, dividends, etc.) You may be able to reach some interesting conclusions about the nature of a filer from examining the sources of its income and their relative amounts. For example, some nonprofits may receive most of their funds from gifts. This income would be reported on Line 1 (Contributions, gifts, grants and similar amounts received). In contrast, some nonprofits may receive most of their funds from charging fees for services. This income would be reported on Line 2 (Program service revenue). If the distinction between what may be called donative nonprofits (those that rely primarily on contributions) and what might be called entrepreneurial nonprofits (those that rely primarily on charging for their services) is important to you, learning about the relative amounts of the income that the filer receives from these different sources will be significant.

Below is an example of a Part I which shows that the filer received most of its income from program services (Line 2) (viz., 70%). Note in contrast in Example 1, above, the filer received most of its income from contributions (Line 1) (i.e., over 90% of its total revenue came from contributions).

Example 2

IRS Form 990 - Revenue, Expenses and Changes in Net Assets - Example 2

Program service revenue (Line 2) income may include income from an unrelated business activity, that is, an activity that is not related to the filer’s exempt purposes (other than in providing income to support such purposes). A considerable amount of unrelated business activity may be thought to reflect on the character of the filer. A reader of the filer’s Form 990 can find out about unrelated business income that the filer may have generated by examining Part VII (Analysis of Income-Producing Activities) on page 6 of the Form 990. Click here for an Expansion that explains Part VII.

Line 2 income also includes income from government contracts. (You need to turn to Part VII on page 6 to learn about the type of a filer’s program service revenue.) A fair number of nonprofits get nearly all their support from government contracts. If this fact is important to you, you can learn this from reviewing Part I (and Part VII) of the Form 990.

Below, Example 3 shows a Part VII reporting receipts of government contracts. (Example 3 is based on the figures reported in Part I of Example 2 above.)

Example 3

IRS Form 990 - Revenue, Expenses and Changes in Net Assets - Example 3

Finally, it may be significant that a filer gets most of its income from membership dues reported at Line 3 (Membership dues and assessments). Income reported on Line 3 is for dues that members pay in return for benefits they receive from the filer. If the filer gets most of its income from Line 3 membership dues, that may shed some light on the nature of the filer.

In the preceding paragraphs, we have suggested that by looking at the sources of income a filer receives, something may be learned about its character. Also of importance is finding out about the filer’s capacity to generate income. (As suggested above, here it is important that you have Forms 990 covering more than one year.) To begin with, it may be thought significant that the filer acquires its income from a variety of sources as this may suggest it is not particularly dependent on any one source. On the other hand, a steady flow of income for several years from one particular source (say, contributions or program service revenue) may support an assumption that such income may continue to be received in the future. Similarly a steady source of income for several years from dividends or rents may suggest considerable investment assets and a stable source of revenue. Finally, special events income reported on Line 9 (Special events and activities) may suggest the ability to bring in a singular source of income to help support the filer’s activities. Some may wish to develop ratios showing the proportion of total support provided by various particular sources of support, such as the percent of total revenues made up by contributions.

In addition to supporting conclusions about a filer’s nature and capacity to raise income, continued strong support from contributions, program service revenue and/or membership dues may be taken as suggesting that there are those who believe that the filer does important work and this may be significant for you.

Lines 13-17 of Part I on page 1 constitute the Expenses section of Part I. Line 17 reports total expenses. Except in the rare case that a filer reports payments to affiliates (Line 16), total expenses are the sum of program expenses (Line 13 (Program services)), management expenses (Line 14 (Management and general)) and fundraising expenses (Line 15 (Fundraising)).

We have already suggested that the total expenses reported at Line 17 is a good way to get a quick idea of how extensive a filer’s activities are. In addition, the Expenses section of Part I permits the reader of the Form 990 to quickly find out what proportions of total expenses are made up by the three functional categories of expenses that are elicited by the form, namely, program (Line 13), management (Line 14) and fundraising (Line 15) expenses. Readers of the Form 990 may want to assure themselves that the filer is spending most of its resources on program matters and not on management or fundraising. By simply dividing a particular functional expense total (say, program services) by total expenses, one can learn what percent of total expenses have been spent on that function. For example, in the example from a Form 990 set out below, program expenses make up 60% of total expenses ($1,200,000/$2,000,000 = 60%).

Example 4

IRS Form 990 - Revenue, Expenses and Changes in Net Assets - Example 4

Program services expenses are those incurred to carry out the organization’s mission. Thus, expenses incurred by a social services organization in paying its social workers for delivering services to its clients would be program services expenses. By like token, payments made by a performing arts organization to produce a play would be program services expenses. For a 501(c)(3) group, the activities that these expenses support are usually the basis of the organization’s tax exemption.

Management and general expenses are those incurred in connection with providing overall administration to an organization. The IRS’s "Instructions For Form 990" (Instructions) note as management and general activities such things as preparing for and holding board meetings, working on office management and personnel problems, and accounting and investment activities. The Instructions also make clear that, for example, the expenses incurred in carrying out activities such as the supervision of program services or fundraising are included under those categories and are not included under management and general. Thus, for example, expenses incurred in preparing for and attending a staff meeting called to plan for a future program initiative or to assess present program activities would be part of the program services category (Line 13) and not the management and general category (Line 14). For many small organizations with small staffs, it is likely that management and general expenses will be low as most of management’s time of these groups is spent on supervising the program and fundraising and relatively little on overall management activities.

Fundraising expenses are pretty much self-defining. The Instructions define this category as “ … the total expenses incurred in soliciting contributions, gifts, grants, etc.”

Many believe that nonprofits should not spend an overly large part of their resources on fundraising. If a reader of the Form 990 is of this view, she might look to see what percent of total expenses is made up of fundraising expenses (Line 15 divided by Line 17). For example, in Example 4 from a Form 990 set out above, fundraising expenses make up 30% of total expenses ($600,000/$2,000,000 = 30%). We suggest, however, that care should be taken in interpreting this “fundraising ratio.” If, for instance, a group is new or advancing an unpopular cause, it may need to spend more on fundraising than a group that has been around for some time or is doing something recognized by all as useful. These kinds of qualitative differences are not elicited by the Form 990. Furthermore, a group which spends a fair amount on fundraising (and has a high “fundraising ratio”) may, as a result of the increased revenue resulting from such efforts, be able to do a lot more than a group which spends very little on fundraising (and has a low “fundraising ratio”) and consequently generates less income.

The amounts reported at Lines 13, 14, 15 and 17 are taken from Part II on page 2 of the Form 990. Part II consists of 23 lines (Lines 22 – 44), which list various “object” expenses and four columns of “functional” expenses. Object expenses include such things as compensation paid to staff, amounts paid for telephone and travel, etc. The four columns consist of the three functional expense categories discussed above, that is, program services (column (B)), management and general (column (C)) and fundraising (column (D)), and total expenses (column (A)). Each amount reported as an object expense is, depending on what it is spent on, allocated amongst the three functional expense columns ((except for Lines 22 (grants), 23 (assistance to individuals) and 24 (benefits to members) which are to be reported only as a program expenses). A reader may find it useful to review the types of expenditures a filer made during the year and what functional expense category they were spent on. This can be done by examining Part II.

A note on Line 16 (Payments to affiliates). Certain kinds of payments made to affiliated organizations, such as dues paid by a local charity solely to support its state or national parent, are reported at Line 16. As suggested above, this line is only rarely applicable and usually shows zero.

Copyright © 2006
Nonprofit Coordinating Committee of New York, Inc.
135 West 36th Street, 15th Floor
New York, NY 10018
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www.npccny.org

How to Read the IRS Form 990 & Find Out What it Means can be accessed online at www.npccny.org/Form_990/990.htm

May, 2011: A new version of this paper is available at www.npccny.org/new990/new990.htm.