A nonprofit leader’s guide to reviewing 990s with your board.
As a nonprofit leader, one of your main responsibilities is providing the board of directors the insight and resources they need to bring your nonprofit’s mission to life. Part of that job is presenting financial documents, like the annual Federal Form 990, which is an informational tax return that provides critical information about your nonprofit’s activities, finances, and governance. But this form is much more than a line-item report to the IRS. Because this document is open to the public, it’s really an opportunity to tell your organization’s story to the audiences who care the most, including the communities it serves and the donors who help sustain the mission.
For board members, it’s critical to understand the role they play in reviewing—and scrutinizing—the 990. Within this form, one can see where an organization might need extra support or where it’s making the most impact. The information included in the 990 will inform the important decisions every board member must make about the organization’s future.
As a tax manager at Han Group, my main responsibility is to help nonprofit clients with IRS compliance requirements. But I’m also a board member of a nonprofit myself. As treasurer of the D.C.-based An Open Book Foundation, I also help my fellow board members review and analyze our financial documents.
As you prepare to present or review your organization’s 990, here are some tips that can be helpful to both nonprofit leaders and board members.
For nonprofit leaders, when presenting Form 990, be sure to:
Provide a high-level overview of each section and top-line purpose of key schedules and be prepared to answer board member questions related to specific line items. Start by reviewing the financial summary on Page 1 to get a high-level picture of revenue, expenses, assets and liabilities. Remember to allow finance committee members to dig deeper into the numbers and financial details prior to having the 990 ready for board review and approval.
Focus board members’ attention on qualitative sections and narratives that describe the organization’s activities. This includes Part I, which asks for a description of the organization’s mission and most significant activities. This section is often the first one that potential funders review. Also point them to any fields related to activity, compliance requirements, and current policies and procedures. Schedule O of the 990 provides further explanation for some of the policies, so the wording on Schedule O should be taken into consideration.
For quantitative sections, help board members identify gaps where additional funding is necessary to sustain and grow programs and note areas where additional volunteer support could relieve strain on finances. Help members compare revenue to related program expenses, which will inform how they plan future budgets.
Explain the context for compensation amounts. Part VII lists board members, officers, and key employees along with their compensation amounts. This section often draws scrutiny because people are curious what top leadership makes. Tread carefully here, as exact salaries are sensitive information, so be prepared to contextualize and explain compensation amounts to the board. Offer reassurance around market-rate appropriate pay levels for roles. The goal is oversight of financial health, not questioning specific wages.
For board members, when reviewing Form 990, be sure to:
Pay close attention to key metrics. Review the overall financials on Page 1, which highlights key metrics related to revenue, expenses, assets, and liabilities. Analyze expense allocations to ensure a majority are going toward programs rather than overhead. Evaluate if management expenses and fundraising expenses are a reasonable percentage of total expenses.
Most exempt organizations allocate about 70% to 80% of their expenses to program services, which is reasonable as not every expense an organization incurs is programmatic in nature. It is also advisable to allocate expenses to the fundraising column of the Statement of Functional Expenses as it can raise red flags when an organization receives almost $1 million in contribution revenue and incurs little to no fundraising costs to obtain those funds.
Evaluate governance policies and procedures. Review any yes/no questions throughout the form related to conflicts of interest, whistleblower, document retention, and other key policies. Identify any gaps where additional governance controls and training may be beneficial.
Assess community impact. Examine the number of clients served, program outputs, and outcomes achieved in the past year in the program service accomplishments section. Benchmark against historical performance and goals to gauge the scale of community benefit.
Compare executive compensation year-over-year. While providing context around executive pay as needed, board members can look at how top-level compensation changes from one year’s Form 990 to the next. Outsized increases should be discussed and justified.
The 990 provides valuable insights into the organization that should be regularly reviewed, so leadership’s role is to educate and guide the board on what areas to prioritize. Using these tips, you can tailor areas of focus to match interests and responsibilities of board members.
At Han Group, we exclusively serve nonprofits, so we understand the unique challenges of tax-exempt organizations come tax time. Reach out to Han Group for questions about our work or to submit an RFP.
