ISSUE
When reporting transactions with interested persons on Form 990, beware the “new” concept of “substantial contributors.”
SITUATION
Saltwater Christian College (SCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and section 170(b)(1)(A)(ii). They are required to file Form 990 annually.
As we are working with SCC to complete their Form 990, a question arose with respect to “substantial contributors” and reporting on Schedule L.
“So, in Schedule L, Part IV, we are required to report on certain business transactions with entities that are controlled – 35% or more – by any of our substantial contributors. Two questions. First, who are ‘substantial contributors?’ Second, how do we gather this information?”
We reply, “This is another difficult Form 990 requirement that was added a few years back. A ‘substantial contributor’ is basically anyone who is reported on the current tax year’s Schedule B, Schedule of Contributors. If you are not able to take advantage of the Schedule B ‘Special rule,’ this would mean anyone who gave $5,000 or more to your institution during the tax year. The answer to your second question is ‘very carefully’ and it could take a great deal of effort to try and ‘match’ donors to business transactions.”
Two tips:
- If possible, take advantage of the “Special rule” on Schedule B – generally by completing Schedule A (Form 990), Part II. (See “Tax Tips” 9/28/16.)
- Look closely at the Schedule L, Part IV transaction thresholds (examples included) as this should focus your potential “matching” project.
“RULES”
From 2017 Instructions for Schedule L (Form 990 or 990-EZ):
For purposes of Parts II–IV, an interested person is one of the following:
- A substantial contributor. For purposes of Schedule L, Parts II–IV, a substantial contributor is an individual or organization that made contributions during the tax year in the aggregate of at least $5,000 and is required to be reported by name in Schedule B (Form 990, 990-EZ, or 990-PF), Schedule of Contributors, for the organization’s tax year.
- A 35% controlled entity of one or more individuals and/or organizations described above.
BOTTOM LINE
- Transactions with “Interested Persons” are reported on Schedule L (Form 990)
- Schedule L contains four parts for this reporting: Excess Benefit Transactions, Loans to and/or From, Grants or Assistance (including scholarships), Business Transactions.
- “Interested persons” are generally officers, directors, trustees, key employees, “formers”, founders/creators – and certain family members of and businesses related to those persons.
- In addition, substantial contributors (see above) and (for purposes of Part III, members of an organization’s grant selection committee are deemed to be “interested persons.”
Specific questions? Email Dave Moja
The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.
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