Completing form 990! Part by part...

Parts I through VI of form 990 EZ must be completed by all filing organizations and require reporting on the organization’s exempt and other activities, finances, compliance with certain federal tax filings and requirements, and compensation paid to certain persons. Additional schedules are required to be completed depending upon the activities engaged in and the type of the organization. The entire completed Form 990-EZ as filed with the IRS, except for certain contributor information on Schedule B (Schedule of Contributors), is required to be made available to the public by the IRS and the filing organization, and may be required to be filed with state governments to satisfy state reporting requirements.
Some general rules to follow in filing out Form 990 EZ:

• Complete all applicable line items
• Unless instructed to skip a line, answer each question on the return
• Make an entry (including a zero when appropriate) on all lines requiring an amount or other information to be reported
• Provide required explanations as instructed.

Schedule B to the 990 EZ can be a tricky one. The IRS wants to know if your organization received large contributions from the same donor or donors, and Schedule B is where that issue is probed. The good news for many small bluegrass organizations which receive lots of small donations but no large ones is that if your organization received no contribution of $5,000 or more from the same person, and received no contribution that was 2% or more of what you report on line 1 of your 990 EZ, then you can check a box in Section H and need not complete Schedule B.
Non-profit bluegrass organizations report income from member dues on line 3 of the 990 EZ but only when the amount of the dues reasonably approximates the value of membership to the member—for example when the amount paid for dues roughly equals the value of newsletters and other perks of membership.  If the amount of dues exceeds the reasonable value of membership, then the excess is reported on line 1 as a “contribution”. Depending on your dues structure, you may have to report part of the dues received on line 3 and part on line 1.
The Form 990 and 990 EZ also distinguish between “program service revenue” and “special event revenue,” which can be an issue for bluegrass organizations conducting concerts and other special events. Generally, “program service revenue” is income generated from one of the primary purposes of the organization, while “special event revenue” is from an activity that only indirectly furthers the organization’s purposes and which is designed primarily to raise funds. The IRS instructions for form 990 EZ give the following example which directly applies to many bluegrass organizations:
Example: An organization formed to promote and preserve folk music and related cultural traditions holds an annual folk music festival featuring concerts, handcraft demonstrations and similar activities. Because the festival directly furthers the organization’s exempt purpose, income from ticket sales should be reported on line 2 as program service revenue.
Part II.  Balance Sheet
Every organization is required to complete columns (A) and (B) of Part II of the 990 EZ which calls for a balance sheet, and your organization may not submit a substitute balance sheet. If there is no amount to report in column (A), Beginning of year, enter a zero in that column.
Part III: Programs and Services
Part III of the 990 EZ is where the organization describes its programs and services. A program service is a major (usually ongoing) objective of an organization. All organizations must describe their exempt purpose achievements for each of their three largest program services (as measured by total expenses incurred). If there were three or fewer of such activities, you should describe each program service activity.  Here are some guidelines provided by the IRS:

• Describe program service accomplishments through measurements such as clients served, days of care, number of sessions or events held, or publications issued.
• Describe the activity’s objective, for both this time period and the longer-term goal, if the output is intangible, such as in a research activity.
• Give reasonable estimates for any statistical information if exact figures are not readily available. Indicate that this information is estimated.
• Be clear, concise, and complete in the description. Avoid attaching brochures, newsletters, newspaper articles about the organization, etc.

Part IV: Officers, Directors and Employees
Part IV of the 990 EZ calls for listing the officers, key employees and directors of the organization. This section also calls for disclosure of the compensation paid to these individuals. New in 2008, the filing organization has two options for how it reports this compensation. Option 1 is similar to the 2007 Form 990 method of compensation reporting but is somewhat simplified. It is based on the calendar year, and also on income reported on a W-2 and/or 1099-MISC. Option 2 is essentially the 2007 Form 990-EZ method of compensation reporting which can be based on the organization’s fiscal year. Whichever option is selected for 2008 must be used consistently from year to year, and must be used for all officers, directors, trustees and key employees (and, for 501(c)(3) organizations, for their five highest compensated employees in Part VI). There are detailed instructions on what must be reported under each option, so read the directions carefully.
Unrelated Business Income
Part V asks a series of straight forward questions that must be answered. Line 35 requires a “yes” if your organization’s “unrelated business income” exceeds $1,000, net, i.e., the excess of gross revenues less the cost of goods sold. The rules on what qualifies as “unrelated business income” are complex and the reader is referred to the instructions. Note also that if your organization’s unrelated business income tax liability will exceed $500, estimated taxes must be paid. Use Form 990-W for this purpose.
Part V also asks questions about “disqualified persons” and “excess benefit transactions.” Again, the rules are complex on these topics and the reader is referred to the instructions or to other source materials. Generally, though, a “disqualified person” is someone in your organization who has substantial ability to influence what the organization does. This includes your board members, the executive director, and can include certain donors or contractors and others depending on the circumstances. An “excess benefit transaction” is generally one in which the organization pays a “disqualified person” more in value than the worth of services rendered by the disqualified person. In other words, the IRS wants to know if your organization is slipping extra money to key players and insiders. For most organizations compensation paid to staff and others is presumed reasonable if three requirements are met: (1) the board approves it and the board is free of conflict of interest, (2) your organization relied on comparable pay information from three or more comparable other organizations providing similar services, and (3) the decision is properly documented.
Schedule A is an important part of your 990 EZ.  It calls for the compensation amounts paid to your highest paid employees and contractors (Parts 1 and II), asks a series of “yes” or “no” questions about your activities, where a “yes” requires explanation (Part III), and asks under what section of the code your organization claims it is qualified as a non-profit (Part IV).
In Part IVA there is, in effect, a finance work sheet that requires you to provide running totals for the most recent four years on a variety of items concerning your organization. This information is used to see if your organization passes the “public support” test which is one way to avoid being re-characterized as a “Private Foundation”.  The reader is advised to read the instructions carefully on this issue and to be careful in filling out the worksheet in Part IVA. Basically, the form walks you though a bunch of financial numbers and then concludes with what percent of your support is “public”–-if it is at least 33% you are OK; if not you may be reclassified as a private foundation.