For nonprofits, financial transparency and accountability are essential to maintaining the trust of donors, stakeholders, and the communities they serve. One of the most important tools for demonstrating that accountability is IRS Form 990, which provides a detailed look at an organization’s finances, operations, and governance. Understanding what the form requires and maintaining accurate financial records throughout the year can help your nonprofit remain compliant, strengthen internal processes, and make more informed financial decisions.
What is Form 990?
Form 990, Return of Organization Exempt From Income Tax, is the IRS’ method of evaluation to make sure your nonprofit is financially honest and legitimate. The form is required for tax-exempt organizations to file each year to remain compliant with the regulations and requirements set by the IRS.
Form 990 requires expenses to be separated into one of three areas: program expenses, administrative expenses, or fundraising activity expenses.
The market value of donated services is reportable on Form 990 as program services revenue and can reduce the percentage of administrative and management costs that are directly paid for by your organization’s cash contributions. Volunteers may provide unpaid labor, but that labor still has value that can affect both your taxes and overhead.
Understanding your nonprofit’s key financial statements
Your statement of financial position, or balance sheet, best represents the financial health of your nonprofit. It explains where you can find the lists of assets and liabilities and offers a good way to better understand your group’s general health. Positive net assets show you’re healthy. Negative net assets mean you have some reprioritizing to do.
Your statement of activities is your income statement, showing revenue and expenses over time, and is used to categorize your different revenue sources and expenses. You can use this document to review your change in net assets from the beginning to the end of the year.
Additional financial reporting considerations
Accurate financial reporting is essential for maintaining your nonprofit’s tax-exempt status, meeting compliance requirements, and providing transparency to donors and stakeholders. Keep the following considerations in mind:
- Unrelated business income: If your nonprofit generates income from activities unrelated to its tax-exempt purpose, additional tax reporting may be required. Organizations with multiple unrelated trades or businesses generally must calculate taxable income separately for each activity and report it on Form 990-T, when applicable.
- Employee benefits: Certain fringe benefits may be considered taxable compensation and must be properly valued and reported on employees’ Forms W-2. Review your organization’s benefits to ensure compliance with current IRS requirements.
- Investment income and expenses: Nonprofits must accurately report investment income, including interest and dividends, and separately report applicable investment management fees on Form 990.
Strengthening internal financial controls
Beyond tax reporting, strong internal controls help nonprofits safeguard assets, maintain accurate financial records, and promote accountability. Consider these practices:
- Separate financial responsibilities. Assign different individuals to handle transactions, approvals, and financial reviews to reduce the risk of errors or fraud.
- Establish cybersecurity policies. Protect sensitive financial and donor information through secure systems, access controls, and regular employee training.
- Track fixed assets. Maintain an updated inventory of equipment, technology, and other assets to support accurate financial reporting and prevent losses.
- Review financial records regularly. Conduct periodic internal reviews and obtain independent audits when required by applicable laws, funding agreements, or organizational policies.
- Use appropriate accounting software. Choose systems designed to support nonprofit financial reporting, fund tracking, and compliance requirements. Consider working with accounting professionals who specialize in nonprofit organizations.
Final thoughts
Preparing Form 990 is an important part of your nonprofit’s financial responsibilities, but maintaining accurate records and strong internal controls should be a year-round priority. By staying organized and proactive, your organization can reduce compliance risks, improve financial transparency, and focus more resources on advancing its mission. SEK’s Nonprofit Services team can help your organization navigate Form 990 reporting requirements, strengthen accounting practices, and maintain financial accountability. Contact our team to learn how we can support your nonprofit’s financial needs.
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