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How to Answer Questions on Page One of the Form 990 (Continued)

February 03, 2021

In part two of our 990 blog series, we continue navigating the first page of Form 990. Nonprofits, you’ll want to read up on your requirements.

*Editor's Note: This blog has been updated as of February 3, 2021 for accuracy and comprehensiveness.

This is a continuation of our discussion on Examining Page One of the Form 990 as part of our 990 series. Read my previous blog for more on how to respond to page one questions and tips for highlighting your nonprofit.

Page 1 Continued
Beginning on Line 8 of Page 1, the 990 Form presents some summary information about the organization’s revenue and expenses. All of this information represents totals obtained from other pages of the Form.

Lines 8 through 12 breaks down revenue into 4 categories. Lines 13 through 17 also breaks down expenses into 4 categories, although Line 16 further splits fundraising expenses into professional fundraising fees and total fundraising expenses. Professional fundraising fees have been a source of various abuses over the years and the IRS is especially concerned about the amount of professional fundraising fees as evidenced by its prominent reporting on page 1 of the Form 990.

Fundraising is a very sensitive subject that many charity watchdog groups perform a calculation of something called “fundraising efficiency” utilizing the figures from Page 1 of the 990 Form.

What is fundraising efficiency?

Fundraising efficiency is a measure of how much the organization spends to raise $1 of income. Line #16b – total fundraising expense is compared with Line # 8 – total contributions. By dividing Line 16b by Line 8 the cost of raising $1 is calculated. The inverse of that figure is a percentage known as fundraising efficiency.

For example, an organization whose fundraising expense on Line 16b is reported as $296,000 and whose total contributions on Line 8 are $1,500,000 reflects a cost of 19.7 cents to raise $1 of contribution income and a fundraising efficiency of 80.3%. Unfortunately, this calculation does not include grant income, which does not properly reflect all fundraising efforts as grant writing is a fundraising expense.

What is an ideal fundraising efficiency?

Charity watchdog groups and the financial press indicate that well-run charities should have a fundraising efficiency of at least 65% with some advocating an efficiency of as much as 70% or 75%. Obviously, making sure that you are reporting the correct amounts on these lines of your 990 is extremely important.

Notice also that all of the figures for Lines 8 through 22 are reported for both the current year and the prior year. Therefore, the reader will be able to determine the direction the organization is heading. Are the revenues increasing or decreasing? Are the expenses moving in concert with the revenues?

Part 2 of the 990

Part II of the 990 Form is the signature block. The form is signed by an officer of the organization. That person is taking responsibility for having examined the return to the best of their knowledge and belief, that the information is correct, true and complete. There are steep penalties for providing false information including perjury. The perjury statute under Federal law classifies perjury as a felony and provides for a prison sentence of up to three years for violation of the tax return perjury statute.

The last part of the first page is the signature, name and address of the paid preparer. Even though the paid preparer also signs the return under penalties of perjury, the primary responsibility for the accuracy of the return rests with the officers of the organization. However, the fact that the organization obtains professional assistance in the completion of the form is an important piece of information for the user of the Form 990.

Read Pt. 3: Page Two of the Form 990, Making the Most of Part III

Questions? Contact any member of our Not-for-Profit Services Group.

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