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Form 990: Statement of Functional Expenses

September 02, 2016

Do you know whether your organization’s expenses were used for program purposes vs. management or fundraising purposes? This info must be reported on your 990!

As noted in the previous blog, the financial statement sections of the Form 990 include the Statement of Financial Position or Balance Sheet, the statement of revenue and the statement of expenses. The fact that these financial documents do not appear until pages 9 to 11 of the 12-page core form of the 990 tells us that the IRS believes all of the information disclosed earlier in the form is more important than this financial information. True as that may be, important information is still disclosed on these pages.

The Statement of Functional Expenses (Part IX, page 10) is where you must indicate the details of your organization’s expenses and indicate whether those expenses were used for program purposes vs. management & general or fundraising purposes. In many cases, this will be more detail than you included in your audited financial statements although this information should be readily available from your general ledger system.

This statement within the Form 990 provides 23 lines of specific types of expenses before allowing you some creativity on line 24 – “other expenses not covered above”. Some organizations incorrectly interpret this part of the form and include no expenses on lines 1 – 23 and included all of their expenses on line 24, where they identify them as they desire. This is not appropriate and is certainly not encouraged by the IRS or the resource providing community.

The IRS and the resource providing community want to know how much your organization is spending on certain, specific items. For example, there are specific lines for reporting compensation, pension plan contributions, fees paid to lawyers, accountants and professional fundraisers, investment management expenses and lobbying expenditures. The only expenses which should appear on line 24 are expenses that clearly do not fit into any of the categories enumerated on lines 1 to 23.

Line 26 asks for information on “joint costs”. These are costs that have been incurred in a combined educational and fundraising campaign. Many organizations publish a monthly or quarterly newsletter containing both educational material and a fundraising solicitation. (Actually, many organizations add a solicitation request to every mailing.) This type of publication is subject to the “joint cost” allocation process defined by the FASB and adopted by the IRS. If you are sending material out to the public that is partly educational and partly a solicitation for support, you must be aware of the “joint cost” rules, which are contained in the Accounting Standards Codification in Section 958-720.

On page 11 of the Form 990 core form is the balance sheet information (Part X). As with the two previous financial statements, the IRS requests information about specific balances while also providing an “all other” line for items you may have that do not exactly fit into the IRS defined categories. The information requested for the balance sheet is fairly straight forward and has not been a source for much discussion in IRS or accounting circles.

On page 12, Part XI, there is a schedule that calls for a reconciliation of net assets. Although this is also a straight forward schedule, be aware that various totals must agree to totals entered in other sections of the 990 form. At some point in the future, the IRS will be receiving the majority of 990 forms electronically and they will easily be able to determine when errors have been made in the form preparation if totals that should agree with each other do not agree. This will likely result in a letter from the IRS noting that the form is “incomplete” or inaccurately filed. While errors of this nature will eventually be ironed out, the temporary notation that your 990 form is inaccurately filed is probably not in your best interest.

These types of errors have gone unnoticed by the IRS and there have been no repercussions to inaccurately prepared forms – unless your resource providers have noticed the errors and drawn a negative conclusion about the organization. Don’t let the current situation lull you into bad habits when it comes to preparing your 990 form. Now is the time to sharpen your 990 preparation and review skills so that avoidable errors and mistakes can be systematically eliminated from your process.

The last part of the 990 core form is Part XII containing three questions about financial accounting methods (cash vs. accrual) and auditor involvement in your financial statement process. The IRS wants to know if your organization’s financial statements were subject to audit and if your audit was performed at the appropriate standards level depending on whether you receive federal funding or not. Therefore, if your organization did not obtain the appropriate level of audit, in addition to the issues this will cause with your federal funding source, it will also be highlighted to the IRS.

This concludes our series on Understanding the Importance of your Form 990. If you have questions on any of the schedules we did not cover, please do not hesitate to contact any member of our Nonprofit Team. We are always interested in hearing about other subjects you would like written about on the Mission Matters Blog. Please pass along your suggestions.

Read our entire series on Understanding the Importance of your Form 990.

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