The redesign of Form 990 a few years back ushered in a wave of new reporting, most of which focused on transparency, governance and recordkeeping.  One of the new schedules created from the redesign was Schedule L, Transactions with Interested Persons.  The purpose of this schedule was to allow the IRS and the public to gain visibility into the dealings that organizations have with those close to the organization.

Specifically, the Schedule is broken down into four sections as follows:

I.        Excess Benefit Transactions

II.       Loans to and/or From Interested Persons

III.      Grants or Assistance Benefiting Interested Persons

IV.      Business Transactions Involving Interested Persons

This post focuses on Part IV — Business Transactions Involving Interested Persons.  Specifically, we are going to focus on the definitions of “interested persons” and “business transactions.”  An understanding of these terms should provide a good understanding of the rules associated with this schedule and what must be reported.

“Interested persons,” for purposes of this part of Schedule L, are defined as:

• A current or former (five-year lookback) officer, director, trustee or key employee, as identified in Part VII of Form 990.
• A “family member” of the above.
• An entity (other than a 501(c)(3) organization, a 501(c) organization of the same subsection as the filing organization, or a governmental unit) more than 35% owned or controlled, directly or indirectly, by any of the above.
• An entity (other than a 501(c) organization or governmental unit) of which any of the above was serving at the time of the transaction as a(n):
  — Officer;
  — Director;
  — Trustee;
  — Partner, member or shareholder with direct or indirect ownership in excess of 5%.

In this instance, a “family member” is an individual’s spouse, ancestors, brothers and sisters, children (whether natural or adopted), grandchildren, great-grandchildren and their spouses.

“Business transactions,” in essence, are payments made during the organization’s tax year between the organization and an “interested person.”  Certain thresholds exist in determining whether specific transactions are reportable.  Transactions will generally be reportable if:

• All payments during the tax year between the organization and the interested person exceed $100,000;
• All payments during the tax year from a single transaction between such parties exceeded the greater of $10,000 or 1% of total revenue of the organization;
• Compensation payments during the tax year by the organization to a “family member” of a current or former officer, director, trustee or key employee of the organization listed in Part VII of Form 990; or
• The organization has invested $10,000 or more in a joint venture, whether or not during the current tax year.

These definitions can be fairly cumbersome to navigate.  Below are a few examples of situations explaining when reporting would or would not be required:

Example 1
A family member of an officer of the Board works as an employee of the organization.  If the family member receives compensation of more than $10,000 during the year, then the transaction would be reportable.

Example 2
The child of a Board Member makes $150,000 as a first year associate for a law firm that provides services to the organization.  Since the child does not have an ownership interest of more than 5% in the law firm and is not a member of management, the transactions between the organization and law firm do not need to be reported.

Depending on your situation, reporting transactions with interested persons on Form 990, Schedule L, may range anywhere from a non-issue to a serious reporting issue.  The key is doing some upfront due diligence to determine if the transactions you are contemplating are 1) reportable, and 2) an issue with donors, the public, the IRS, etc. if reported.

For additional details or questions related to business transactions with interested persons or other not-for-profit related issues, contact Jeff Chiles at [email protected] or 312.670.7444.