Certain transactions between your organization and interested persons — including excess benefit transactions, loans, grants, and business transactions — are required to be reported on the Form 990, Schedule L. Ideally, an organization would have a conflict of interest policy that provides guidance to interested persons on reportable transactions with timely disclosure. Documenting any potential reporting requirements as the transactions occur can be resourceful when preparing the Schedule L at the end of the year. Additionally, documentation is the key to a quick and successful IRS inquiry or audit on transactions with interested persons.
Below is a quick guide on what and who should be reported.
Transactions typically reported:
- Joint ventures
- Contracts of sale
- Lease
- License
- Insurance
- Performance of services
- Transactions with management companies
- Maintaining checking, savings, and other accounts at a financial institution*
- Payments of fees to or interest paid by financial institutions
- Excess Benefit Transactions
- Loans
- Grants
*deposits and withdrawals in the ordinary course of business on the same terms as the general public would not be required to be disclosed.
Persons with certain powers, responsibilities, or interest to influence organizations’ decisions are known as interested/disqualified persons. When certain transactions listed above are entered into between these persons and the organization, the transactions are required to be reported on the Form 990, Schedule L. Determining who has this influential power needs to be determined for each person each year and for each applicable organization in an affiliated group.
Some of these interested persons are obvious while others can require a review of the facts and circumstances. Below are some persons that could have potential transactions that need to be reported when that transaction is between the person and the organization.
Who is an interested person?
- Trustee (board member)*
- Director*
- Officer*
- Key Employee*
- Creator or founder of the organization
- Substantial contributor
- Related persons to anyone listed above
- Entity controlled by anyone listed above**
*Current or former reported on Form 990, Part VII
**Controlled is ownership of 35% or more
When a person does not easily fall into an identified interested/disqualified person category, substantial influence is one of the key factors to review. Below is a list of factors interested/disqualified persons have with regards to reporting.
Qualifications of a person with substantial influence:
- Voting governing body members
- Position has potential to exercise substantial influence
- Person holds certain powers, responsibilities, or ownership
- Person is CEO, COO, CFO, Treasurer or has similar responsibilities*
- Person with ultimate responsibility for implementing governing body decisions
- Person that supervises the organization’s management, admin or operations
- Person with ultimate responsibility for managing organization’s finances
- Entities owned 35%
- Family members of interested/disqualified persons
- Donor or donor advisors to a donor advised fund
- Investment advisors of sponsoring organizations
- Person giving over $5,000 in current or for preceding taxable years and the gift is greater than 2% of total contributions for the five year period
- Person with compensation primarily based on revenues
- Person with authority to control/determine operating budget, capital expenditures, of employee compensation
- Person managing a substantial segment/activity of total activities, assets, income, or expenses
- Person with controlling interest in an affiliated organization
*Person could be managing the organization without the title, but have the same responsibilities.
The following is a list of facts that would not cause a person to be an interested/disqualified person or have substantial influence.
Persons that do not have substantial Influence:
- Person taking a vow of poverty on behalf of a religious org
- Person receiving the same preferential treatment offered to all with a same size donation
- Independent contractors solely providing professional advice in return for adequate payment
- Person not participating in management decision
If you need assistance determining reportable transactions with interested persons for Schedule L or have additional questions, we can assist! Please give us a call to discuss.
