2017 is over, and for those that report on a calendar year its time to start thinking about your 990. We’re big fans of soccer, so we decided to take a look at 990 filings from some local Youth Soccer organizations to see what we could find out. We found a number of apparent errors in the filings, many of which are likely repeated by other types of not-for-profit organizations as well:
- Reporting an incorrect legal form of the organization in section K of the 990 header. Several organizations checked the “Association” box here, when they were actually incorporated in their state (we actually checked, by the way). In the form 990 instructions, the IRS refers to “unincorporated associations”, which, in a legal sense, is very different from a Corporation. An organization may have the word “Association” in its name, but in nearly all cases a non-profit will legally be a Corporation. If in doubt, check your organizational documents or your state’s website.
- Reporting “advertising” income as related to the organization’s exempt function in Part VIII, which indicates this income is not subject to unrelated business income tax. Sponsorship and advertising income, if it is received in exchange for a “substantial return benefit”, as defined by the IRS, would be considered an unrelated business activity of the organization and, accordingly, potentially subject to income tax. The IRS does allow sponsorship income to be treated as exempt function income if it meets certain criteria. Care should be taken to understand the terms of the sponsorship agreements, the IRS regulations and definitions of “sponsorship” and “advertising” to make sure this income is reported correctly in forms 990 and, if necessary, reported in a form 990-T. Additional IRS information can be found here.
- Unclear labeling of the type of expense being reported on Part IX, line 24. The nature of some expenses was not always clear from the descriptions used in some filings. For example, one organization reported an expense line item for “Program Expenses” on Part IX, line 24. The IRS instructions for form 990 requires that the four largest dollar amounts for other expenses be reported “…on lines 24a through 24d and the total of all remaining, miscellaneous expenses on line 24e. Don’t include a separate entry for ‘miscellaneous expenses,’ ‘program expenses,’ ‘other expenses,’ or a similar general category in lines 24a-d.” Typically it is expected that the specific nature of the expenses (i.e. Game Supplies, Uniforms, League Fees, etc.) be used as a descriptor for the expense, rather than more generic descriptions such as “Program Expenses” or “Administration” which don’t provide much useful information to those reading the 990s, particularly when the amounts are relatively large.
- Unusual allocation of Functional Expenses between Program Services, Management & General and Fundraising on Part IX. Some organizations report most or all of certain types of expenses as “Management and general expenses”, when it appears that portions could (and should) be categorized as “Program service expenses”. For example, one organization reported all salaries and wages as “Management and general expenses” even though some compensation was reported for Coaching and Player development personnel, which appears on the surface to apply to the organization’s soccer program. The IRS expects that reasonable allocations of expenses between these categories be made for the 990 even if the underlying accounting system used does not track expenses in this way. Aside from being incorrect, overstating Management and General expenses can make your organization appear as though it isn’t efficiently using its income for its stated exempt purpose, which isn’t how you want to appear.
- Reporting expenses in Part IX line 11 rather than line 24, or vice versa. Line 11 is intended to capture expenses for “Independent Contractors”, defined in the instructions as “An individual or organization that receives compensation for providing services to the organization but who isn’t treated as an employee.” Some returns described expenses in line 24 “Other Expenses” that appear to fit better in line 11 based on the description.
- Reporting payroll taxes in line 10 that appear unusually large in relation to the reported compensation in lines 5 through 7.Line 10 is intended to capture “…the employer’s share of social security and Medicare taxes, the federal unemployment tax (FUTA), state unemployment compensation taxes, and other state and local payroll taxes…” which would typically be from 7-9% of total compensation. Some organizations reported payroll taxes that were over 20% of the reported compensation, which could be indicative of an accounting or reporting error. Remember, when you are remitting income taxes withheld from employees it should be reported as compensation expense, not payroll tax expense.
- Reporting Accounts Payable when the organization indicates it is reporting on a cash basis. Accounts payable is understood to represent amounts that have been billed by suppliers, but which have not been paid. This line item would not typically show up on a cash basis balance sheet since, by definition, it has not been paid.
- Answering “No” to questions that aren’t applicable to the organization when they should be left blank. This was most common in Part V, lines 7, 8 and 9.
- Indicating that no 1099s have been filed in Part V, line 1a when there are significant expenses reported for independent contractors in Part IX, line 11. While it is theoretically possible to have significant expenses related to independent contractors without having to file 1099-MISC forms and the related form 1096, reporting zero on line 11 could indicate there is a compliance issue that could draw the attention of those reviewing the form 990. Penalties for failure to issue 1099-MISC forms, when required, can be significant, so organizations should be sure that they have complied with these regulations.