Over the years, many clients have come to us with the same question, “Why does our 990 have different information than our financial statements?” There are a few reasons for this, but before we dive into those, let’s discuss the IRS Form 990.

The IRS designed Form 990 to enhance transparency of a nonprofit organization’s mission and activities and to promote compliance with applicable tax law requirements.  Since the 990 return is a public disclosure document, 990s are easily accessible online for anyone to review.  Therefore, the organization needs to ensure that the information reported on the 990 is accurate.  To do that, you have to understand the unique ways information is reported on Form 990, and how it relates to the organization’s financial statements.

You probably have people on staff and/or the board who understand financial statements, but do you have anyone who understands Form 990? Audited financial statements are reported in accordance with auditing standards generally accepted in the United States of America (GAAS). The 990 return uses a mix of GAAS and tax-basis accounting.

So what are the most common differences between the Form 990 and your audited financial statements?

If your organization has multiple related entities, the first difference you will notice is that each legal entity is reported on a different 990 return.  Your consolidated audited financial statements combine multiple entities into one set of financial statements. Transactions between the entities are eliminated- if one entity pays rent to another, the rental revenue and expenses are not shown on a consolidated report.  Unless an entity is a disregarded corporation for tax purposes, a separate 990 return is required for each nonprofit entity that has its own EIN. Going back to the example above, the entity paying rent will show rent expense on the 990, and the entity receiving rent will show rent revenue on the 990.

Schedule D

Most of the other differences between the 990 and your financial statements can be found by reviewing Schedule D. Schedule D reconciles your 990 to your financial statements and is required if the organization received separate audited financial statements.

• Donated services and facilities that are recognized under GAAS are not reported on the 990. If you have these on your financial statements, the total revenue and expenses on the 990 will be lower.
• On your financial statements, investment revenue is typically reported net of investment expenses. On the 990, investment revenue is reported in Part XVIII, and investment expenses are reported in Part IX.
• Investment unrealized gains/losses are reported on your financial statements. For tax purposes, the investment return is not recognized until it is realized- that is until the investment is sold.
• Fundraising events are reported gross on your financial statements but net of expenses on the 990.
• Similarly, merchandise/inventory sales are also reported gross on your financial statements but net of expenses on the 990.

For organizations operating on a fiscal year

For organizations that operate on a fiscal year rather than a calendar year, there are also differences in reporting within the 990 itself. Part VIII revenue and Part IX expenses are reported for the fiscal year covered by the return. The payroll and independent contractor information reported in Part V and Part VII is reported for the calendar year that ends within your fiscal year. This makes sense because W-2s and 1099s are always filed for the calendar year regardless of the fiscal years used by the organization. Again, because W-2s and 1099s are always on the cash basis of accounting, the information reported in Part VII is also on the cash basis – payments made during the calendar year instead of accrued.

• Part VII reports compensation reported on Forms W-2 and/or 1099s. These are cash-based payments during the calendar year ending within the fiscal year covered by the return.
• Part IX reports compensation paid during the fiscal year covered by the return. Amount is reported on the accounting basis used by the organization which may be accrual.

While this article covered the most common differences between Form 990 and your audited financial statements, every organization is unique and you may encounter other variances. If you have specific questions or would like more in-depth information, reach out to our team of 990 experts.