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Navigating the Redesigned Form 990: A Sea Change in Reporting By Tax-Exempt Organizations

Navigating the Redesigned Form 990: A Sea Change in Reporting By Tax-Exempt Organizations. Stephen Clarke Form 990 Redesign Manager Internal Revenue Service, Exempt Organizations Dallas/Ft. Worth Council of Hospitals March 24, 2009

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Navigating the Redesigned Form 990: A Sea Change in Reporting By Tax-Exempt Organizations

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  1. Navigating the Redesigned Form 990: A Sea Change in Reporting By Tax-Exempt Organizations Stephen Clarke Form 990 Redesign Manager Internal Revenue Service, Exempt Organizations Dallas/Ft. Worth Council of Hospitals March 24, 2009 Material provided in this presentation is for educational use only and is not intended to establish IRS position or practice and may not be relied on or cited as precedent. For more detailed information, please refer to the "Charities and Nonprofits" section of www.IRS.gov

  2. Form 990 Redesign--Background • Form 990—main IRS tool for enforcement and promoting compliance with tax exemption law • Form 990-EZ – easier version of Form 990 for smaller organizations • No major revisions since 1979 • Fails to meet tax compliance & transparency needs • Does not provide full picture of organization • Three guiding principles in redesign: • Promote tax compliance • Enhance transparency • Minimize burden • 5-year redesign process—finalized Dec. 24, 2008 • Effective date: 2008 tax years (tax years beginning in 2008)

  3. Form 990-Major Changes • Form 990 is now primarily an activities report, rather than an accounting report • Provides opportunity for organizations to tell their story, emphasize service to community • Management implication: do not rely only on CPA and/or CFO to complete form • Core Form (11 pages) + 16 Schedules • New “snapshot” summary page • New Schedule O for narrative responses • New section on governance • New filing thresholds for 990 and 990-EZ filers

  4. Schedule H - Hospitals • Who files? Organizations that own or operate a “hospital” • “Hospital”: facility that is, or is required to be, licensed, registered, or similarly recognized by a state as a hospital • Only Part V (Facilities) is required for 2008; other sections are optional • “Facility”: facility that, at any time during tax year, was required to be licensed, registered, or similarly recognized as a health care facility under state law • Report name, address, and type of each facility

  5. Schedule H (Hospitals) • Information to be reported on Schedule H: • Certain quantifiable community benefit (Part I) • Community building (Part II) • Bad debt (Part III(A)) • Medicare (Part III(B) • Collection practices (Part III(C)) • Joint ventures providing medical care (Part IV) • Facilities (Part V) • Other community benefit and narrative responses (Part VI)

  6. Schedule H (Hospitals) • Source of information to report on Schedule H: • Hospitals operated by filing organization • Hospitals operated by disregarded entities • Other facilities or programs of the organization that provide medical or health care services • Hospitals operated by joint ventures • Group returns: hospitals operated by members of a group exemption that are included in the group return • Do not report foreign hospitals or facilities or information therefrom, other than in Part IV (joint ventures); may describe in Part VI

  7. Schedule H--Hospitals • Community benefit table (Part I, Question 7): • Charity care at cost • “Charity care”: free or discounted health services to persons who meet organization’s criteria for financial assistance • Report charity care criteria (e.g., FPG, medical indigency) • Report denial of charity care because of budget limitations • Do not report bad debt as charity care • Unreimbursed Medicaid (and other means-tested public programs) • Community health improvement services • Community benefit operations • Health professions education (includes costs of all programs open to public)

  8. Sch. H Community Benefit Table • Subsidized health services • Clinical services provided to meet an identified community need, despite financial loss to the organization • May include physician clinics and skilled nursing facilities, if they meet criteria for subsidized health services • Report the cost of physician clinics in Part VI • Research • Cost of research funded by organization or tax-exempt entity • Describe any research funded by for-profits in Part VI • Cash & in-kind contributions to community groups, if • Restricted for community benefit • Not funded by a related organization

  9. Schedule H--Hospitals • Total v. net community benefit expense (columns (c) and (e) in Community Benefit Table) • Net out “direct offsetting revenue” (column (d)) • Patient payments for services • Third party payment/reimbursement for services • Do not include restricted or unrestricted grants as direct offsetting revenue • “Total expenses” for column (f): Part IX, line 25 • If any bad debt is included in Part IX, line 25, exclude it in calculating column (f) numbers, explain in Part VI • Column (f) reflects % of expenses attributable to community benefit

  10. Schedule H Worksheets • Worksheets for Community Benefit Table • Not required to be completed or submitted • However, the methodology in the Worksheets for calculating community benefit must be followed • Describe in Part VI: • costing methodology used to calculate amounts in Community Benefit Table • Whether the organization used a cost accounting system, cost-to-charge ratio, or other methodology

  11. Schedule H--Hospitals • Community Building (Part II) • “Community building”: activities to protect or improve the community’s health or safety • Report cost of: • organization’s community building activities • grants to others for community building activities • Report only costs not reportable in Parts I or III • Describe in Part VI how these community building activities promote the health of the community

  12. Schedule H--Hospitals • Bad Debt (Part III(B)) • Report bad debt at cost, using most accurate system and methodology available • Describe this methodology in Part VI • Describe how organization accounts for discounts and payments on patient accounts in determining bad debt • Report in Part VI how much bad debt expense could be attributable to persons who likely would qualify for financial assistance under charity care policy • Provide in Part VI the text of any bad debt footnote in the organization’s financial statements • Or, if the financial statements account for bad debt, explain how they do so

  13. Schedule H--Hospitals • Medicare—Report allowable costs in Part III(B) • Report costs and net patient service revenue associated with allowable costs, as reported in Medicare Cost Report • Org. may report costs not included on its Medicare Cost Report in Part VI • Describe in Part VI the extent to which any portion of Medicare shortfall should constitute community benefit • Describe in Part VI the costing methodology used to determine Medicare allowable costs reported on line 6

  14. Schedule H--Hospitals • Part IV—Joint Ventures: list any JVs or management companies: • Of which the organization was a partner or shareholder at any time during the tax year; • That provided management services or medical care; and • Of which any or all of the following owned, in the aggregate, more than 10% of stock or share of profits: • officers, directors, trustees, key employees; and • physician employees or medical staff members

  15. Part VI, Governance, Management, and Disclosure - Overview • Some policies or practices asked about are not required by the Code • However, all organizations must complete Part VI • Rationale: Good governance→ increased compliance • Part VI sections: • Section A: Governing body and management (Pt. I) • Section B: Policies and practices (Pt. II) • Section C: Public disclosure (Pt. III)

  16. Part VI, Governance – Section A, Governing Body and Management • Q1a: Number of voting members of governing body • Voting member: Member of governing body with power to vote on all matters that come before body • Q1b: Number of independent voting members: • Board member was not compensated as an officer or employee of the filing organization or related organization; • Board member did not receive compensation over $10,000 as an independent contractor of the filing org. or a related org.; and • Neither Board member nor any family member of Board member was involved in a transaction reportable on Schedule L

  17. Form 990, Schedule L • Part 1-Report excess benefit transactions with disqualified persons (only 501(c)(3) and 501(c)(4) organizations) • Part II-Report loans to and from interested persons • Any disqualified person • Any current or former ODTKE listed in Part VII • Part III – Report grants/assistance to interested persons • Any current or former ODTKE listed in Part VII • substantial contributors (don’t identify by name) • related persons (family, selection committee member) • Part IV – Business transactions with interested persons • Any current or former ODTKE listed in Part VII • Don’t report transactions with interested persons < the greater of $10,000 or 1% of revenues, unless $100,000 rule applies • $100,000 rule: report all transactions with an interested person that equal, in the aggregate, over $100,000 during the tax year

  18. Part VI, Section A, Governing Body and Management • Organization may rely on reasonable efforts to obtain information on: • number of independent voting members for Question 1(b) • business/family relationships for Question 2 Example: distribution of questionnaire • Definition of “officer”—includes • top management official • top financial official • any officers required under state law; and • any officers designated by Bylaws or Board resolutions

  19. Part VI, Section A, Governing Body and Management • Q2: Any ODTKE family or business relationships? If yes, explain in Schedule O; exceptions: • relationships from ordinary course of business transactions • privileged relationships (e.g., attorney-client, physician-patient, priest-penitent/clergy-communicant) • Qs 6-7: Does organization have members who elect governing body or approve its actions? If yes, explain in O • Q10: Q—Did the organization provide the final version of the Form 990 to each voting member of its Board before filing the Form with the IRS? --ALL explain in O • Describe the process by which ODTKEs review Form 990

  20. Part VI, Section B, Policies • Q12: Conflicts of interest policy? • If yes, is annual disclosure of conflicts required? • If yes, describe in Schedule O how organization monitors and enforces compliance with the policy, if it does so • Q15: Did process for determining compensation of CEO and other officers and key employees meet IRC 4958 standards for establishing rebuttable presumption of reasonableness? • If yes, filers must describe the process in Schedule O • Q16: Participation in joint venture? • If so, has organization adopted JV policy?

  21. Part VI, Section C, Disclosure • Q18: List how organization makes Forms 990, 990-T, 1023/1024 available for public inspection • Organization’s website • Another organization’s website • Upon request • Q19: All filers must describe in Sch. O how org. makes its governing documents, conflicts of interest policy, financial statements available to public

  22. Form 990, Part VII, Compensation • All filers must complete Part VII • Sec. A: List name, title, and compensation (from filing org. and related orgs.) of all of the filing organization’s: • Current officers, directors, and trustees, regardless of compensation amount • Current key employees (see definition) • Current five highest compensated employees with reportable comp. over $100,000 who are not listed as ODTKEs • Former directors or trustees with reportable comp. over $10,000 for services provided in their capacity as directors or trustees • Former officers, key employees, or highest compensated employees with reportable comp. over $100,000 • “Reportable compensation”—from Form W-2 • Report compensation on a calendar year basis (calendar year ending with or within organization’s fiscal year)

  23. Form 990, Part VII, Compensation • Current “key employee” – 3 part-test (all three tests must be met) • 1. Responsibility test: • person with overall responsibilities for the organization as a whole (except for CEO, who is treated as an officer); and • Person who manages or has the authority to control more than 10% of organization’s overall activities, assets, income, expenses, capital expenditures, operating budget, or compensation for employees • 2. $150,000 test: • Reportable compensation from org. & related orgs.>$150,000 • 3. Top 20 test: • Among 20 employees with the highest reportable compensation during tax year from org. and related orgs. (other than officers, directors & trustees) who meet Responsibility Test and $150,000 Test

  24. Form 990, Part VII, Compensation • Formers: five-year look-back period for determining “former” ODTKEs to report in Pt. VII, section A • If person was or should have been reported as an ODTKE on any of the five prior Forms 990 • Report former “key employees” from 5 prior years even if they don’t meet the 2008 definition of “key employee” • Report only former 5 highest compensated employees who: • (1) are not employees of the organization at any time during the tax year; • (2) received reportable compensation from organization and related orgs. exceeding $100,000 for the calendar year; and • (3) received reportable compensation that would place person among the organization’s current 5 highest paid employees if the person were still employed during the tax year

  25. Form 990, Part VII, Compensation • Report W-2 compensation from filing organization for each ODTKE in column (D) • Report W-2 compensation from “related organizations” (see definition in Schedule R) in Pt. VII(A), column (E) • Parent or subsidiary • Brother or sister • Supporting or supported organization • $10,000-per-related-organization-exception: don’t report in column (E) reportable compensation from a single related organization if less than $10,000 (except for payments to a former director or trustee) • exception only applies to reportable—not “other”—compensation • Entire compensation, including items excluded under $10,000 exception in Pt. VII, must be reported in Sch. J, if applicable • Report other comp. from related orgs. in column (F)

  26. Form 990, Part VII, Compensation • “Other compensation” reported in column (F) includes • All health plan benefits • All retirement plans and other deferred compensation • Each type of other non-taxable benefits (except certain fringe benefits) greater than $10,000 per organization • Use compensation table to determine what types of benefits need to be reported in Part VII(A) and Sch. J • 10,000-per-item-exception: do not report an item of “other compensation” less than $10,000 for any person listed in Part VII(A) • Exception: always report health and retirement plan benefits and deferred compensation for each person listed in Pt. VII(A), regardless of value • Entire compensation, including items excluded under $10,000 exception in Pt. VII, must be reported in Sch. J, if applicable • Do not report nontaxable fringe benefits excludible under section 53.4958-4(a)(4) of the Regulations

  27. Form 990, Part VII, Compensation • Unrelated organization compensation: report compensation from unrelated organizations • to any person(s) listed in Part VII • for services rendered to the filing organization • Sec. B: list name and compensation of 5 highest compensated independent contractors with compensation over $100,000 • Including fundraisers, management companies, lawyers, accountants • Report actual payments, whether or not listed on Form 1099 • Schedule J reporting: • All former ODTKEs listed in Part VII, Section A • All current ODTKEs in Sec. A with compensation > $150,000

  28. Resources • http://www.irs.gov/charities • 2008 Form 990 & draft instructions • Overview and Background Paper • 990 mini-courses at stayexempt.org • Questions: Stephen.M.Clarke@irs.gov Material provided in this presentation is for educational use only and is not intended to establish IRS position or practice and may not be relied on or cited as precedent. For more detailed information, please refer to the "Charities and Nonprofits" section of www.IRS.gov

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