At first glance, Form 990 Schedule O appears quite innocuous, just a bunch of blank lines and nothing more. However, first impressions can be deceiving. There are a few minimum requirements that make this form a requirement, rather than option as it may appear. Further, for proactive filers, Schedule O offers an important opportunity to tell more of a not-for-profit’s story. Read on to find out how and why your organization or client may wish to do this.
Perhaps surprisingly, Schedule O is the only one of the 16 different Form 990 schedules that must ALWAYS be prepared, regardless of whether a Form 990-EZ or Form 990 is being filed; regardless of whether the filing organization is a §501(c)(3) charitable organization or a non-charitable exempt organization. Accordingly, filing a Form 990 without Schedule O will likely result in a letter from the IRS indicating an incomplete return was filed. The filing organization will have to submit a reasonable cause for omission explanation, along with the completed Schedule, or penalties could apply.
At a minimum, a Schedule O must include narratives addressing the following:
- The process, if any, used by the organization to review the Form 990 being filed (Part VI, Line 11b)
- Whether (and if so, how) the organization made its governing documents, conflict of interest policy, and financial statements available to the public during the tax year (Part VI, Line 19)
In addition to the required Part VI narratives, Schedule O provides the exempt organization with an opportunity to further explain information reported on the Core Form 990. (Note that all Form 990 schedules include “blank lines” sections for additional explanations pertaining to that particular schedule.) Accordingly, Schedule O is generally used for Core Form explanations, narratives and spillover information, such as:
- Part I, Line 1 re: organization’s mission or most significant activities
- Part III, Line 1 re: organization’s mission
- Part III, Line 4 re: organization’s significant program service activities
- Part XI, Line 9 re: other changes in net assets or fund balances
Form 990 filers are encouraged to look beyond the minimum requirements and consider using Schedule O proactively to provide additional information or explanations that would be important to readers. The following examples illustrate this utility:
- Provide reasons why the ratio of fundraising expenses (reported on Part I, Line 16b) to total contribution revenue (reported on Part I, Line 8, current year) is too “high” or too “low”
- Provide the necessary details regarding any new program service activities undertaken by the filing organization (Part III, Line 2)
- Explain a negative response on Part VI, Line 8b when the filing organization does not have any Board Committees with the authority to make decisions on behalf of the entire Board
- Explain a negative response on Part VI, Line 15b when the filing organization does not employ any key employees
- Explain why the number of voting Board members reported on Part VI, Line 1a does not directly tie to the number of voting Board members reported on the Part VII compensation table (usually because of Board turnover during the year)
- Provide more information regarding Part XI, Line 8, prior period adjustments
A Form 990 filer can use as many pages of Schedule O as they desire. Since the Form 990 is a public document, private information (such as social security numbers or any proprietary information) should NEVER be reported on Schedule O. Form 990-EZ filers may use Schedule O more extensively than Form 990 filers, since the Core Form 990-EZ offers fewer opportunities for thorough explanations.
When preparing Form 990 Schedule O, it is prudent to think about all possible users of the form and consider the type and extent of information that would be important to them. It’s easy to miss this critical thought process and maintain a “check-the-box” mentality, looking to provide only the minimum data required to satisfy the IRS. In fact, there are numerous other parties interested in a not-for-profit’s Form 990, including current and potential donors and grantors, the media, watchdog groups, lenders, volunteers, and other constituents.
Form 990—and especially Schedule O—is a chance for not-for-profits to tell their stories. Don’t miss the opportunity to spotlight the mission, programs, and accomplishments of the organization and explain information that could be misinterpreted by only looking at the Core Form. The public looks at the Form 990 as a key component for due diligence when they are considering a commitment of time or resources to an organization. They want to understand the not-for-profit’s financial health and ability to carry out its mission and program activities, as well as the strength of its governance.
For more information on Form 990 preparation, components and common mistakes, visit the AICPA Not-for-Profit Section’s Tax Compliance Resource Library, and be sure to mark your calendars for an upcoming Form 990: Learn from the Experts webcast.