Form 990-N, 10 years later
Prior to the passage of the Pension Protection Act of 2006, small exempt organizations, other than black lung benefit trusts (Form 990-BL) or private foundations (Form 990-PF) that did not meet the $25,000 gross receipts test of the Form 990-EZ, were excused from filing with the Internal Revenue Service (IRS). As a result of the lack of any filing requirement, these nonreporting entities would remain on the IRS books as tax-exempt organizations in perpetuity. There was no way for the IRS to tell if these organizations operated below the filing threshold, operated above the filing threshold but neglected to file, or were no longer operating or even in existence.
The Pension Protection Act of 2006 brought into force a new set of filing requirements for most small exempt organizations. Beginning in 2008, almost all organizations that were previously exempt from filing as a result of the organization’s gross revenue amount were required to file annually with the IRS. The IRS developed a Form 990-N to be used by applicable organizations to meet the filing requirements. Further, as a result of the change in the law, the IRS is now required to revoke an organization’s exemption if it has not filed an exempt organization information return in one of the last three years. Per a 2014 Government Accountability Office (GAO) report on tax-exempt organizations, initially more than 570,000 organizations have had their exemptions revoked as part of the automatic revocation process.
For the years 2008 and 2009, the maximum average gross revenue permitted for the filing of the Form 990-N was $25,000. For years ending or after Dec. 31, 2010, small organizations that normally have annual gross receipts of $50,000 or less are permitted to file a Form 990-N. Where the Form 990-EZ has both a gross receipt (less than $200,000) and a total asset test (less than $500,000) that must be passed to file the EZ, the Form 990-N has only a gross receipts test. To determine the ability to use the Form 990-N, an applicable organization is only required to consider its gross receipts as defined in the appendix instructions to the Form 990.
While most organizations that are required to file from the Form 990 series may file a Form 990-N if the organization meets the gross receipts test, supporting organizations as described in section 509(a)(3), and political organizations as described in section 527, are not permitted to file a Form 990-N and must file either a Form 990-EZ or Form 990. Other organizations that are not permitted to submit a Form 990-N to satisfy their filing requirements include sections 501(c)(1) U.S. government instrumentalities, (c)(20) group legal services plans, (c)(23) pre-1880 armed forces organizations, (c)(24) ERISA section 4049 trusts, 501(d) religious and apostolic organizations, 529 qualified tuition programs, 4947(a)(2) split-interest trusts, 4947(a)(1) charitable trusts treated as private foundations, all other private foundations and black lung benefit trusts.
For most organizations, having zero gross receipts will not present any issues regarding the organization’s status as an exempt entity. For publicly supported charities described in sections 509(a)(1) and (a)(2), a revenue-based test must be met in order to remain a publicly supported charity. For the first five years (60 months) of its existence, a publicly supported charity is presumed to meet its public support test. At the end of the first five years, an organization that wishes to remain a publicly supported organization, and not be treated as a private foundation, will need to pass one of the public support tests as described in sections 509(a)(1) or (a)(2).
The public support test for organizations filing a Form 990 or Form 990-EZ is calculated in Schedule A. The section 509(a)(1) test requires that an organization receives at least one-third of its support from contributions from the general public, or meets a 10 percent facts and circumstances test. The section 509(a)(2) test requires that the organization receive more than one-third of its support from contributions from the general public and/or from gross receipts from activities related to its tax-exempt purpose. Under section 509(a)(2), the organization cannot receive more than one-third of its support from gross investment income and unrelated business taxable income. These tests are measured over a five-year period beginning at the end of the organization’s first 60 months of existence. A new organization filing a Form 990 or Form 990-EZ is not required to show its public support percentage, but is required to show all items that make up the calculation of the percentage in Parts II or III of Schedule A. A publicly supported organization that fails to meet its public support test for two consecutive years is considered to be a private foundation. As a private foundation, the organization would then be required to file a Form 990-PF.
As a result of the public support rules of sections 509(a)(1) and (a)(2), a public charity, filing the Form 990-N and required to meet one of the public support tests, will need special diligence. While there is no Schedule A attachment required as part of the Form 990-N filing, a public charity filing a Form 990-N described in sections 509(a)(1) or (a)(2) is still required to monitor its public support test compliance. If the organization no longer qualifies as a public charity, the organization must file a Form 990-PF in the first year it no longer qualifies. An example of a public charity becoming a private foundation is a case where the public charity has no income. If there is no income, the public support test percentage is zero. If an organization has a zero public support percentage for two consecutive years, and if a zero public support test will not satisfy either the sections 509(a)(1) or the (a)(2) public support percentage test, the organization will become a private foundation after the second year of a zero public support percentage. A private foundation is normally required to file a Form 990-PF even if it has no income.
In addition to public support issues for section 501(c)(3) publicly support charities that file the Form 990-N, all entities filing a Form 990-N are still responsible for their compliance with the rules concerning unrelated business taxable income (UBTI). The Form 990-T is required when an exempt organization has gross receipts of UBTI greater than $1,000. A careful review of an organization’s income should be undertaken by organizations filing Form 990-N to ensure compliance with the UBTI rules.
For small tax-exempt organizations, the implementation of the Form 990-N now represents an added layer of required compliance and documentation. A failure to follow the requirements of the Pension Protection Act can result in the loss of exempt status with related expenditures of time, effort and money to revive the organization’s exemption. Publicly supported charities filing the Form 990-N must pay close attention to their public support percentage to guard against becoming a private foundation due to a lack of public support. All exempt organizations filing the Form 990-N are required to track their UBTI and file a Form 990-T if the gross UBTI is more than $1,000 for their tax year.