ANALYSIS OF THE FORM 990 FOR NOT-FOR-PROFIT

ANALYSIS OF THE FORM 990 FOR NOT-FOR-PROFIT

Overview

Pathway home is a charitable organization that provides a non-time-limited housing and supportive services to persons with mental disabilities. It is a project that aims at shining on mental health victims by providing education, information, and hope. This organization started its operations in 1980 and operates from Northern Virginia. It habits adults and children with severe mental illness and co-occurring disabilities. Currently, it serves more than four hundred people in community-based homes (McManus, 2010). The organization embodies the spirit of recovery. It embraces an attitude of home, self-determination and partnering with every individual on their efforts towards realizing their dreams. They assist individuals to achieve self-fulfillment in life. They are determined to create a future in which all persons with mental illness can lead a meaningful life. With own efforts and determination, they can help them lead self-directed lives in a home of their choice that offers support and services they need. They value consumer empowerment since they encourage choice and assist users of their services to assume increasing degrees of independent living, self-sufficiency, and self-confidence. To ensure they achieve their goals, they respect the inherent worth and dignity of all individuals and promote self-determination to express self-worthiness.

The Form 990

IRS Form 990 is a form that provides information about most tax-exempt organizations that must be filled annually. This Form gives revenue authorities mostly referred to as internal revenue service an overview of organization activities, governance, and financial information in detail. IRS also requires Not-for-profit organizations to outline their accomplishments of the previous fiscal year to justify maintaining their status as tax-exempt organizations (Gordon, 2007). This Form ensures organizations that are tax-exempted do not relax in their work, and they utilize their funds efficiently. This form focuses on the board of directors’ independence. Their independence ensures that the organization is looking for the interest of the public rather than individual interests. Not-for-profit organizations are required to provide a narrative of their compensation process. This process includes compensation to the employees and by providing this narrative; they can defend themselves against accusations of excessive compensation. Form 990 also focuses on bond issues and the organization’s compliance surrounding itself and its subsequent use. This form is intended to inform the public about crucial aspects of tax-exempted organizations. Potential donors have a chance to examine the work of these organizations that helps them to make a decision whether to continue funding them. Information on this form is also intended to inform the IRS about an organization’s financial activities and financial status to demonstrate that an organization still meets the qualifications for tax exemption (Sloan, 2009).

Not-for-profit organizations that have gross income that is between $200000 or assets worth $500000 must file Form 990. Other organizations like political organizations and religious organizations are exempted from filling this form. Not-for-profits are required to describe their mission and other critical activities associated with revenue, expenses, assists, and liability. Part five of this form requires these organizations to attach supporting documents depending on the answers provided. Schedule C, which reports on the political activities of the organization, may be attached. Similarly, Schedule D and Schedule F may also be assigned to provide detailed financial information and reports on organizations level of organization. Finally, schedule G must be attached as it contains information on organizations fundraising activities (Trocchio, 2009).

An annual report of a company is the primary document for communicating its financial results for the previous fiscal year. This report also contains management’s revenue and profit projections for the coming year. The majority of the audiences of this report are regulators and analysts. Regulators need information from this report for checking compliance and maintaining EDGAR. EDGAR is an online database that investors use for researching public companies. Analysts use these report to analyze businesses and industry sectors. By this research analyst can assess the long-term prospects of individual companies and general industry trends. Unlike the Form 990 whose audience is the IRS, annual reports have a larger audience (Gregory, 2009). Majority users of annual reports are employees, investors, customers, creditors, suppliers, and media. An organization uses this statement to motivate its employees and educate them on various operating divisions and product line. While investors are always eager to know how their investment is doing in the market. Unlike Form 990 whose primary users the donors and the IRS.

Statement of cash flows

The statement of cash flows of a not-for-profit organization summarizes the resources that were at the disposal of the company on the previous financial year. This report also outlines the uses of these resources. These statements are useful in real-time since they provide information on income and expenses of an organization. A projected cash flow statement helps the board and the organization, in general, to anticipate any shortfalls for planning purposes.

Formation, operation and liquidation of not-for-profit organization

In the U.S. Nonprofit organizations are formed by filling bylaws or articles of incorporation.  Filling of these documents takes place in the state in which they expect to operate. They create a legal entity by incorporation of the organization. Treatment of an organization as an independent entity from the owners is a result of this policy. As a legal entity, the organization can transact on its own and can sue or be sued. These organizations may have members but most of them do not. The governance of these organizations is responsible for providing strategic direction, guidance, and controls. By governance, we refer to the top management of the entity. These entities work from their mission, to identify few service goals that must be reached to accomplish their mission (Greiling, 2010). Resources are arranged in programs to achieve each objective. Winding up of a not-for-profit organization can be voluntary or forced. Before liquidation members may decide to distribute any property to discharge any liabilities. On the other hand, an entity may apply for Certificate of Intent to Dissolve before liquidation. This certificate serves as a public notice that the organization is not in business anymore. All members must authorize liquidation and liquidation of the organization.

Bankruptcy

Not-for-profit organizations usually operate on minimal budgets and direct most of their funds into the programs they run. They occasionally take out debts to improve the quality and quantity of their services. When they can no longer pay their debtors, they can be declared bankrupt. Debtors can file for liquidation of the company’s assets to pay creditors and clear unpaid debts. However, an entity may file for bankruptcy but continue to operate. They can work by developing a plan with its creditors to pay debts under certain terms.

Legal Reorganizations

The law regulates all operations of a not-for-profit. The law states that no one is supposed to gain any profit from the capital invested in its operations. These organizations may exist as an entrepreneurial company, single owner’s enterprise or a non-governmental organization. They are allowed to receive donations but only spend them in the stipulated purpose as per the Articles of Incorporation. They are treated as a distinct person who can operate on this own. They can work through a lawyer who offers legal advice and direction that the entity should follow.

Government and not-for-profit accounting

Since these organizations do not make any profit, they are required to prepare the statement of activities in place of an income statement. This statement shows all the activities carried out by the entity. Some of these activities are income generating while other are expenses. These organizations are governed by their budgets and not by the marketplace (Dickinson, 2007). Budgets are more important than the annual report. Since there no owners to these entities there is owners equity.

Income taxes and consolidation

Income tax on these organizations depends on whether the organization is tax-exempted or not. Tax-exempted entities depend on the public for their endorsements. Failure for its exemption, a not-for-profit has to pay income tax. This payment is as a result of their treatment as companies for income tax purposes. Not-For-Profits are supposed to pay capital gain taxes. However, consolidations are optional for wholly-owned corporations. These consolidations are non-reversible. They always operate as a single entity for income tax purposes.

Higher Education: private and government

The government operates Private higher education institutions. In most cases, they receive tax breaks, students’ loans, and grants. They may be a subject of government regulation. They are non-profit making organizations. In contrast, public universities are funded by public means. They are supposed to account for all activities carried out during a financial year thus making them not-for-profit organizations

Transactions and reporting

Since most of not-for-profit receives their funding from donors, they have a high degree of accountability. Their financial statements show how they utilize the available resources. They are also required to report their financial outcomes of their efforts. These reports are used by donors to gauge the performance of the entity. The IRS also uses these documents for tax exemption purposes.

Joint ventures and joint ownership

A not-for-profit can be a joint venture or partnership. Two or more organization can form a joint venture. Two or more people with the same aim and goal form a partnership. A joint venture may exist in different forms be it a merger, a fee-for-service agreement or a partnership agreement. All members of a partnership have equal rights, and they share duties equally among themselves. A not-for- profit may exist in either of the forms and achieve its goals effectively.

Segment reporting

            Segment reporting deals with reports of the operating segments of a company in the disclosures accompanying its financial statements. This kind of reporting is necessary for public entities. Segment reporting is intended to give information to investors and creditors regarding the financial position of an entity. This information helps in decision-making. An operating entity engages in business activities that earn revenue and incur expenses. Documents provided by these segments should provide information such as factors used to identify reportable segments, the types of products produced and services offered by each sector and depreciation and amortization. Segment reporting requirements are under International Financial Reporting Standards.

Reference

Dickinson, S. &. (2007). Evaluations of branding alliances between non‐profit and commercial brand partners: the transfer of affect. International Journal of Nonprofit and Voluntary Sector Marketing, 12(1),, 75-89.

Gordon, T. P. (2007). The quality and reliability of Form 990 data: Are users being misled. Academy of Accounting and Financial Studies Journal, 11(Special Issue), 27-49.

Gregory, A. G. (2009). The nonprofit starvation cycle. . Stanford Social Innovation Review, 7(4),, 49-53.

Greiling, D. (2010). Balanced scorecard implementation in German non-profit organisations. International Journal of Productivity and Performance Management, 59(6), , 534-554.

McManus, A. G. (2010). The potential of the Code for Sustainable Homes to deliver genuine ‘sustainable energy’in the UK social housing sector. Energy Policy, 38(4),, 2013-2019.

Sloan, M. F. (2009). The effects of nonprofit accountability ratings on donor behavior. . Nonprofit and voluntary sector quarterly, 38(2),, 220-236.

Trocchio, J. (2009). Reporting Community Benefit: A Guideline for Navigating the IRS Form 990, Schedule H. . Journal of Healthcare Management, 54(5),, 301.

 

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