In a matter of weeks, the 2015 tax season will be over. The federal individual and most state returns will be filed by mid-April (the exceptions are Hawaii, which has a filing deadline of April 20; Delaware and Hawaii, both filing on April 30; and the Commonwealth of Virginia, with a deadline of May 1), late returns are largely in process, and the tax preparation firm is winding down employment of seasonal staff.
There is, however, one other major opportunity for substantial revenues (and profits) with minimal investments in time. That opportunity is the preparation of the annual reports and financial reports for non-profit organizations that are reported on IRS Form 990 or Form 990-EZ (for smaller organizations).
In general, the Internal Revenue Service requires tax-exempt organizations to file one of the following forms each year:
|Status||Form to File||Instructions|
|Gross receipts normally < $25,000||None|
|Gross receipts normally ≤ $50,000
Note: Organizations eligible to file the e-Postcard may choose to file a full return
|Gross receipts < $200,000, and
Total assets < $500,000
|Gross receipts ≥ $200,000, or
Total assets ≥ $500,000
|Private foundation - regardless of financial status||990-PF||Instructions|
Courtesy of IRS.gov
Revenues available from serving non-profits
According to the 2015 fee survey conducted by the National Society of Accountants, preparation of the Form 990 generates an average fee of $688, compared to $273 for an itemized Form 1040 with Schedule A and a state tax return.
This number, however, is a simplification of the prospects for serving non-profits. Much like the individual 1040 marketplace, there are other forms and services that may be used or required that enhance this fee. For example, meeting with clients prior to accepting the 990 preparation engagement is typically $150 of service time. While it may be offered for “free,” those costs have to be recovered somewhere.
Likewise would be a consultation with the non-profit’s board of directors to present the draft report and make corrections prior to filing, which can run as high as $500, depending on the organization and its structure.
Other services may include:
- Form 990 EZ Preparation. Preparation of this four-page short form is more likely to cost the organization in the range of $500 to $700 due to the non-financial information required to be collected and validated. Includes the 8-page Schedule A, the report of Public Charity Status, and statement of Public Support.
- Form 990 Preparation. This 12-page report for organizations exempt from federal taxes, along with the 8-page schedule A, will typically cost $1,000 to $1,500. Larger organizations, including those with for-profit subsidiaries, will require more wore and command larger fees.
- Form 1023 Preparation and Filing. This is the application to the IRS for recognition as a tax-exempt organization should already be in the non-profit’s files. If not, the organization will need one as rapidly as possible – or a duplicate of the original. Either way, this form is a minimum of $500.
- Form 8868 Preparation. Non-profit reports must be filed by the 15th day of the 5th month after the end of your organization's accounting period. Thus, for a calendar year taxpayer, Form 990, 990-EZ, or 990-PF is due May 15 of the following year. The organization may request an automatic three-month extension, without showing cause, by filing a Form 8868, Application for Extension of Time to File an Exempt Organization Return. The organization may request a second three-month extension by filing a second Form 8868 and explaining why it has reasonable cause for needing the additional three months. This five-page report generally costs $250 and up.
Rules of Engagement
Two factors are emerging to drive the opportunity in non-profits – the need for continued growth in a tax preparation facing increasing competition; and the expected growth of the non-profit markets.
In a survey of non-profit professionals in Washington, DC, approximately three-quarters indicated that they expect their nonprofit organizations to grow. Seventy-seven percent of the respondents expect growth and increased revenues in 2015, compared to 76 percent last year. Respondents reporting improved current financial health rose to 63 percent, up from 57 percent last year.
To take advantage of these opportunities, however, will require that the tax practitioner follow a few rules before and during a non-profit engagement:
- Start slow and build. It is far better to build a practice on local charities and non-profits than to launch into complex national and international reports without experience.
- Require clients organize all information prior to meeting. No shoe boxes of receipts are acceptable, and the client is responsible for affirming that the financial and other data provided for the form is accurate and complete. Much of the information may be found in the previous years’ Form 990s, and this will also provide comparative data to spot irregularities.
- Ask for procedures and timing for bidding the engagement. Many organizations are required under their bylaws to put the Form 990 up for competitive bids every 1 – 3 years. By knowing when, it is easier to present your firm and its capabilities.
- Prepared to file extensions. Extensions are, in fact, a way of life in the non-profit world. Organizations that are thriving are busy, caught up in legislation, running conferences and other events, can often be unprepared for the deadline to file.
- Know the penalties for failuring to file. They can be steep. If the organization does not file the Form 990 or request an extension, it may fall subject to penalties that accrue daily up to a maximum of $10,000 for non-profits with receipts below $1 million, and $50,000 for receipts above $1 million.
- Review the Form 990 before filing. The form should be reviewed for accuracy not only by the preparer but by the non-profit board of directors and accounting executives.
Non-profits, and particularly smaller or local organizations, are not difficult to serve in terms of filing their annual Form 990. It requires some advance planning and preparation, but yields comparatively higher revenues for the engagements undertaken.