Form 990 Part VII is a crucial section of the tax return for exempt organizations. It focuses on reporting compensation for officers, directors, trustees, key employees, and highly compensated individuals, making it closely scrutinized by various entities.
Purpose of Part VII
The primary purpose of Part VII of Form 990 is to provide transparency regarding the compensation paid by tax-exempt organizations to their key personnel. This section aims to publicly disclose the financial arrangements with officers, directors, trustees, key employees, and highly compensated employees. It is designed to ensure accountability and prevent potential abuse of nonprofit resources by individuals in positions of authority and influence within the organization. The information reported is subject to scrutiny from the public, potential donors, and other organizations, and also the IRS itself.
Who Must Be Reported in Part VII
Form 990 Part VII requires reporting of officers, directors, trustees, key employees, and highly compensated employees. These individuals are subject to specific reporting thresholds and definitions.
Officers, Directors, and Trustees
Form 990 Part VII mandates the inclusion of all individuals who served as officers, directors, or trustees of the organization during the tax year. This encompasses both individuals and, in some instances, organizations acting in these roles. The reporting ensures transparency regarding leadership and governance within the tax-exempt entity. It is essential to accurately identify and report all such persons.
Key Employees
Key employees are individuals who hold significant influence over the organization’s operations, management, or finances. These individuals may not be officers or directors but wield considerable power and responsibility. Identifying key employees is crucial for Form 990 reporting as it ensures transparency regarding those who hold substantial sway within the organization. The IRS definition should be strictly followed when determining who qualifies as a key employee for this section.
Highly Compensated Employees
Highly compensated employees are individuals who receive significant compensation from the organization. Form 990 requires reporting of these employees to ensure transparency about the organization’s spending practices. The IRS has specific compensation thresholds that determine who qualifies as a highly compensated employee. It is essential to accurately identify individuals meeting these criteria based on their total compensation from the organization, regardless of their specific role or title within the entity.
Compensation Reporting Period
Compensation reported in Part VII should align with the calendar year, ending within the organization’s tax year. This applies to both Part VII and Schedule J, which uses calendar year data.
Calendar Year Reporting
The reporting period for compensation within Form 990, Part VII and Schedule J, is specifically the calendar year. This means that organizations must report compensation paid or earned during the period from January 1st to December 31st, regardless of their fiscal tax year. This consistency ensures a clear and standardized view of compensation across different organizations and aids in accurate comparisons. This requirement necessitates dual record-keeping for organizations that operate on a fiscal year basis.
What Compensation to Include
Reportable compensation includes amounts reported on Form W-2 (box 1 or 5) for employees and Form 1099-MISC (box 7) for independent contractors. This covers payments from the filing and related organizations.
W-2 and 1099-MISC Reporting
When reporting compensation on Form 990 Part VII, organizations must include amounts from Form W-2, specifically box 1 or 5, whichever is greater, for employees. For independent contractors, such as directors or trustees, compensation from Form 1099-MISC, box 7, should be reported. This encompasses all payments for services rendered, whether from the filing organization itself or from related entities, ensuring a comprehensive record of compensation.
Base, Bonus, and Other Compensation
Reportable compensation on Schedule J must be categorized into base compensation, bonus or incentive compensation, and other reportable compensation. The ‘other’ category includes payments for prior-year earnings, severance, and longevity awards. This detailed breakdown offers transparency into the various forms of compensation provided to individuals. Proper classification is essential to ensure accurate and complete reporting under the IRS guidelines, reflecting the total financial benefits given.
Deferred Compensation and Benefits
Reporting deferred compensation and benefits on Schedule J is essential. This includes details on retirement plans and nontaxable benefits, offering a complete view of the financial packages.
Reporting Deferred Compensation
Schedule J requires reporting all types of deferred compensation, including both qualified and non-qualified plans. This includes the annual increase or decrease in actuarial value of defined benefit plans. It does not include earnings on defined contribution plans. Compensation is considered earned ratably over the service period, even if subject to forfeiture. Payments within 2.5 months of year-end are considered current, not deferred.
Nontaxable Benefits
Certain benefits, though nontaxable, must be reported on Schedule J, unless they are considered disregarded under IRC Section 132. Disregarded benefits include accountable plan reimbursements, no-additional-cost services, qualified employee discounts, de minimis benefits, and working condition benefits. A de minimis fringe is one that is too small to account for. Working condition fringes are business-related expenses. Directors and trustees are treated as employees for working condition fringe provisions.
Related Organizations and Compensation
Form 990 requires organizations to identify related entities. These include parent, subsidiary, brother/sister, supporting/supported organizations, and VEBA sponsors. Compensation from these related entities must be reported.
Definition of Related Organizations
A related organization, for Form 990 purposes, encompasses a variety of entities linked to the filing organization. This includes parent organizations that control the filing organization, subsidiaries controlled by the filing organization, and brother/sister organizations under common control. Furthermore, supporting and supported organizations, as well as sponsoring organizations of a VEBA, also fall under this definition. These relationships must be assessed throughout the tax year to determine reporting obligations on Form 990.
Compensation from Related Entities
Compensation paid by related organizations must be carefully reported on Form 990. This includes payments from parent, subsidiary, and brother/sister entities, as well as supporting or sponsored organizations. Such compensation is reported alongside the compensation paid directly by the filing organization. This helps to provide a complete view of the total compensation received by individuals from entities connected to the reporting organization; Understanding which organizations are considered related is crucial for accurate reporting of compensation on Form 990.
Exceptions to Reporting
Certain exceptions exist for reporting compensation in Part VII. These include a $10,000 exception for related organizations and a volunteer exception for certain individuals. These exceptions are important.
The $10,000 Exception
Generally, payments from a single related organization, totaling less than $10,000, do not need to be included in Part VII, Section A, column (E). This exception applies for the calendar year ending within the organization’s tax year. It is important to note, however, that this de minimis exception does not apply to payments made to former directors or trustees. Furthermore, this exception is not relevant for Schedule J reporting, which has different rules.
Volunteer Exception
Compensation paid to volunteer trustees, directors, or officers does not need to be reported in Part VII, Section A, columns (E) or (F), under specific circumstances. This exception applies when the related organization is a for-profit entity, not owned or controlled by the filing organization or related tax-exempts. It also requires that the related for-profit entity not provide management services for a fee to the organization. It’s important to distinguish this from “other reportable compensation” in Schedule J.
Record Keeping Recommendations
Organizations should carefully consider their record-keeping practices to ensure they capture all necessary compensation information for accurate reporting on Form 990 Part VII and related schedules.
Maintaining Accurate Records
To ensure compliance with Form 990 Part VII, organizations must maintain meticulous records of all compensation paid to officers, directors, trustees, key employees, and highly compensated employees. These records should encompass both cash compensation and the value of non-cash benefits, including deferred compensation. It is also essential to document the nature of any related organization payments. Accurate record keeping is critical to prevent errors and potential scrutiny during audits.