The 2020 Form 990, Return of Organization Exempt From Income Tax, and instructions contain the following notable changes:
The IRS continues to make (1) minor stylistic and substantive corrections, (2) updates to annual revenue procedure references and inflation-adjusted dollar amounts, and (3) useful cross-references to formal IRS guidance and information available on the IRS website.
Action item: Organizations should consider their responses to questions on the Form 990 in light of the changes to the form and instructions for 2020.
See also: Below are links to our annotated version of the 2020 Form 990, including all schedules and instructions. The documents include PwC’s highlights of and comments on key changes for 2020. The documents are searchable and include bookmarks to assist with navigation.
The Taxpayers First Act, enacted in 2019, mandates electronic filing for all Form 990 series returns, including Forms 990, 990-EZ, 990-PF, and 990-T. (Organizations previously were required to e-file Form 990 only if they exceeded certain return filing and asset thresholds.)
The 2020 Form 990 instructions contain reminders that, starting with tax years beginning on or after July 2, 2019, all organizations must file Form 990 series returns electronically. Consistent with this change, information relevant to paper filing Form 990 (such as IRS Service Center mailing addresses) has been removed from the instructions. The 2019 Form 990 instructions contained a list of exceptions describing specific circumstances in which a 2019 Form 990 for a tax year beginning on or after July 2, 2019 was permitted to be paper filed. This list of exceptions has been omitted from the 2020 Form 990 instructions.
Observation: Although the instructions to the 2020 Form 990 do not contain a list of exceptions to the general electronic filing requirement, IRS Publication 4163, Modernized e-File (MeF) Information for Authorized IRS e-File Providers for Business Returns Tax Returns Processed in Year 2021, provides that tax year 2020 Forms 990 cannot be e-filed for (1) name change returns, (2) returns from organizations not recognized as exempt (for example, application pending), (3) returns showing a change in accounting period, (4) short-period returns, except for short-period initial or final returns, and (5) early filed returns, (in other words, filed before end of tax year, except for final returns).
Organizations must enter on Form 990, Part VII, the amount of ‘reportable compensation’ and ‘other compensation’ paid to certain individuals for the calendar year ending with or within the organization’s tax year. Schedule J, Compensation Information, and certain other parts of the Form 990 also rely on the definition of reportable compensation.
In prior years, reportable compensation was defined as aggregate compensation that is reported (or required to be reported, if greater) on (1) Form W-2, box 1 or 5 (whichever amount is greater) and/or (2) Form 1099-MISC, box 7. Beginning with tax year 2020, taxpayers must use Form 1099-NEC, box 1, rather than Form 1099-MISC, box 7, to report nonemployee compensation. The definition of reportable compensation contained in the glossary to the 2020 Form 990 instructions has been modified to add reference to Form 1099-NEC, box 1, and remove reference to Form 1099-MISC, box 7.
In addition, the 2019 Form 990 instructions to Part VII have been modified to include amounts reported in Form 1099-MISC, box 6 (medical and healthcare payments), as reportable compensation; however, the 2019 Form 990 glossary definition of reportable compensation and the instructions to Schedule J were not updated to reference Form 1099-MISC, box 6. For 2020, references to Form 1099-MISC, box 6, were added throughout the relevant parts of the Form 990 instructions.
Observation: As a result of the changes described above, ‘reportable compensation’ — as the term is used throughout the 2020 Form 990 — includes amounts reported (or required to be reported if greater) in (1) Box 1 or 5 of Form W-2 (whichever amount is greater), (2) Box 1 of Form 1099-NEC, and (3) Box 6 of Form 1099-MISC.
PPP was established by the CARES Act in 2020 to provide loans to small businesses (including some small nonprofits) to incentivize them to keep workers on the payroll during the coronavirus pandemic. The loans may be forgiven if certain criteria are met. The 2020 Form 990 instructions explain that PPP loans may be reported as contributions from a government unit in the year the loans are forgiven for purposes of the revenue statement (Part VIII, Line 1e) and public support calculations (Schedule A, Parts II and III).
Observation: Many organizations have received non-PPP relief payments related to the pandemic from government sources, such as Federal Emergency Management Agency and Health and Human Services relief. The instructions do not expressly address reporting these non-PPP funding sources. Filing organizations will need to interpret the general Form 990 instructions to report non-PPP relief funding.
In June 2020, the IRS published final regulations that exempt most types of tax-exempt organizations, other than those described in Section 501(c)(3) or Section 527, from the requirement to report names and addresses of substantial contributors on Schedule B. The instructions to Schedule B have been updated to reflect the final regulations.
Observation: Many organizations that the IRS recognizes as tax-exempt are described in Section 501(c)(3). These organizations still must disclose the names and addresses of substantial contributors in Schedule B. Organizations not required to report the names and addresses on Form 990 must continue to (1) collect the names and addresses of their contributors, (2) keep this information in their records and books, and (3) make the information available to the IRS upon request.
Schedule E consists of a series of questions that requires tax-exempt private schools, colleges, and universities to demonstrate that they have adopted and operated consistently with a student racially nondiscriminatory policy.
Rev. Proc. 75-50 provides guidelines and recordkeeping requirements as to a school’s racially nondiscriminatory policy. The Rev. Proc. provides that a school must make its nondiscrimination policy known to the general community served by the school by (1) publishing notice of the policy in a newspaper of general circulation or (2) publicizing the policy via broadcast media (i.e. television or radio).
Rev. Proc. 2019-22 modifies Rev. Proc. 75-70 and provides that a school may display a notice of its racially nondiscriminatory policy on its primary, publicly accessible internet homepage at all times during its tax year in a manner reasonably expected to be noticed by visitors to the homepage. The publicly accessible homepage must not require a visitor to input any information, such as a username or email address, to gain access. Numerous factors are considered in determining whether a notice is “reasonably expected to be noticed by visitors to the homepage,” but a link on the homepage to another page containing the notice is not acceptable.
The instructions to the 2019 Form 990, Schedule E were updated to explain this new guidance. For 2020, the language in Schedule E, Line 3 itself has been updated as follows to reflect the new guidance:
Has the organization publicized its racially nondiscriminatory policy on its primary publicly accessible Internet homepage at all times during its taxable year in a manner reasonably expected to be noticed by visitors to the homepage, or through newspaper or broadcast media during the period of solicitation for students, or during the registration period if it has no solicitation program, in a way that makes the policy known to all parts of the general community it serves? If “Yes,” please describe. If “No,” please explain. If you need more space, use Part II.
Observation: A school must publicize its nondiscrimination policy through one of the specified means in order to check ‘Yes’ on Schedule E, Part I, Line 3. However, because there are certain exceptions to the publicity requirement, a school that answers ‘No’ to Schedule E, Part I, Line 3 is not necessarily noncompliant. For instance, a school is not required to satisfy the publicity requirements specified above if the school customarily draws a substantial percentage of its students nationwide or worldwide or from a large geographic section or sections of the United States and can demonstrate that it follows a racially nondiscriminatory policy by showing that it currently enrolls students of racial minority groups in meaningful numbers.
The 2020 Form 990 contains several notable changes, including (1) changes reflecting mandatory electronic filing, (2) modification of the definition of reportable compensation to reflect implementation of Form 1099-NEC for reporting nonemployee compensation, (3) clarifications regarding reporting of forgiven PPP loans as government grants, (4) updates to Schedule B instructions consistent with final regulations that provide that certain types of tax-exempt organizations are not required to disclose the names and addresses of contributors, and (5) updates to Schedule E for how schools publicize their racially nondiscrimination policy.
Failure to timely file a complete and accurate Form 990 may have adverse impacts, including penalties and loss of tax-exempt status. As a result, nonconforming or incomplete responses on Form 990 could result in additional IRS scrutiny.
Health Services Tax Leader, PwC US