As most exempt organizations know all too well, preparing federal tax Form 990 can be a time consuming and complicated process. However, the form does have considerable value for the marketing of your organization. We have compiled a list of 5 important marketing considerations on a Form 990.
1. Using the Form 990 as a Marketing Tool: The Form 990 can be a valuable marketing and development tool. Once the Form 990 is filed with the IRS, it becomes a public document that potential donors, sponsors, and grant recipients can use to obtain information about the organization. Information can also be accessed by the state regulators and the media. The organization should consider Form 990 disclosure as an opportunity rather than a burden. Use the Form 990 as an opportunity to tell the organization’s story by effectively stating its mission and program service accomplishments. Careful consideration should be given to all of the information presented. The IRS and various watchdog agencies encourage the public to review organizations’ Form 990 tax returns.
2. Ensuring Good Governance: The IRS’s goals for Form 990 are increased transparency, good governance, and increased accountability for filing organizations. Form 990 requests information regarding an organization’s governing body and management, governance policies, and disclosure practices. Although federal tax law does not mandate these policies and practices, every organization is required to answer each question. Answering these questions “No” may be perceived negatively by the public because of an expectation that a prudently managed organization would have the following specified policies:
- Conflict of interest policy;
- Whistleblower policy;
- Document retention policy;
- Process for determining compensation;
- Joint venture policy.
Organizations that do not have these policies and procedures in place may want to implement them, even though not required by the IRS, to avoid potential public and potential donor misperception about their stewardship.
3. Allocating Functional Expenses: Form 990 Part IX reports expenses in three categories:
- Program service;
- Management and general;
Some costs incurred by an organization clearly relate to a specific program or function and should be charged directly to that function. The function of other costs may not be readily identifiable (e.g. rent or telephone). An organization is allowed to use any reasonable method to allocate these expenses. Proper allocation of expenses between these functions is very important. The amount of funds spent on program services (when compared to total expenses) is a measurement of the organizations effective stewardship of its assets. Donors want to know the extent to which their contributions are used primarily for charitable purposes. Likewise, the IRS, state governments, and watchdog agencies examine expense classifications to verify that the organization is operating within certain guidelines.
4. Carrying out Public Support Tests: Schedule A is used to provide required information regarding an organization’s public charity status and financial support. Part I, Schedule A, requires an organization to indicate why it is not a private foundation by checking the box for one of 11 categories of public charities. Many publicly supported organizations must describe their revenue in either Part II or III. This information allows the IRS to determine whether an entity meets the applicable public support test. The higher the percentage of public support, the stronger the organization will appear to the general public. An organization is not required to use the same public support test specified in its determination letter from the IRS. It can annually use the support test that best reflects its sources of support and that enables it to retain public charity status. For those organizations whose exemption category requires performing the support tests in parts II or III of Schedule A, failure to pass both of these tests may result in their loss of public charity status and being characterized as a private foundation.
5. Understanding marketing and compliance significance go hand-in-hand on the Form 990: When completing the Form 990, understanding marketing’s impact is critical – and so is ensuring compliance. In next month’s Nonprofit Advisor newsletter we will uncover things to consider when it comes to compliance on the Form 990. For more information or to learn more, you can contact me at RCitino@friedmanllp.com.