Definition and Purpose of Schedule L
Schedule L (Form 990 or 990-EZ) is a critical reporting document mandated by the IRS for certain tax-exempt organizations. Its primary purpose is to disclose transactions with "interested persons," which typically include board members, key employees, and their family members. This disclosure is crucial for maintaining transparency and accountability within nonprofit operations.
The form encompasses various types of transactions, such as:
- Excess benefit transactions, which occur when an organization pays more than fair market value for goods or services from an interested person.
- Loans extended to interested persons by the organization.
- Grants awarded to interested individuals or entities.
- Other business transactions that may create a conflict of interest.
By requiring nonprofits to report these transactions, the IRS aims to prevent potential abuses and ensure that organizations operate within the boundaries of tax law.
How to Complete Schedule L: A Step-by-Step Guide
Completing Schedule L requires careful attention to detail. Below is a structured approach to filling out the form correctly.
-
Identify Interested Persons:
- List all individuals and entities classified as interested persons. This includes board members, major donors, and their relatives.
-
Document Transactions:
- For each interested person, outline any transactions that occurred during the reporting year. Provide details such as the type of transaction, amount, and purpose.
-
Assess Fair Market Value:
- For excess benefit transactions, it's essential to evaluate if the compensation or transaction price exceeds fair market value. This assessment will aid in determining if an excess benefit occurred.
-
Complete Detailed Sections:
- Schedule L consists of multiple subsections corresponding to different types of transactions (excess benefit, loans, grants, etc.). Fill in these sections by cross-referencing organizational records and financial statements to ensure accuracy.
-
Review and Validate:
- After filling in all necessary information, review the form for completeness and accuracy. It is advisable to have another party, such as an accountant or legal advisor, verify the entries.
-
Submit with Form 990 or 990-EZ:
- Finally, ensure that Schedule L is submitted alongside the main Form 990 or Form 990-EZ within the required filing deadlines.
How to Obtain Schedule L
Obtaining the 2016 Form 990 or 990-EZ (Schedule L) can be done through various channels, ensuring that tax-exempt organizations have easy access to the necessary documentation.
-
IRS Website: The primary source for downloading Schedule L is the IRS official website. The forms are available in PDF format, allowing organizations to print and fill them out.
-
Tax Preparation Software: Many tax preparation software programs, such as TurboTax or H&R Block, include Schedule L and provide user-friendly interfaces to facilitate the form completion process.
-
Professional Assistance: Engaging a tax professional or accountant experienced with nonprofit tax filings can be invaluable. They can help obtain the form, guide its completion, and ensure compliance with IRS regulations.
Who Needs to File Schedule L?
Schedule L is specifically required for tax-exempt organizations under certain conditions. The following entities typically need to file this form:
-
Charitable Organizations: Nonprofits organized under IRC section 501(c)(3) often engage with interested persons and must disclose transactions to ensure compliance.
-
Private Foundations: Foundations that provide grants or loans may engage in transactions with interested persons, requiring detailed reporting on Schedule L.
-
Other Tax-Exempt Organizations: Entities classified under different sections, such as 501(c)(4) or 501(c)(6), which have significant financial dealings with interested individuals, are also obligated to complete Schedule L.
Filing Schedule L is crucial for preserving the tax-exempt status of an organization, making it essential for the above entities to accurately report all relevant transactions.
Key Elements of Schedule L
When preparing to complete Schedule L, it is important to understand its key components to ensure a thorough and compliant submission. The following elements are integral to the form:
-
Interest Person Identification:
- Each interested person must be accurately identified, including their relationship to the organization.
-
Type of Transactions:
- The form categorizes transactions into distinct types, mandating specific reporting formats for each.
-
Amount Disclosed:
- Each transaction involving interested persons must clearly state the monetary amounts, assessing whether they meet the threshold for disclosure.
-
Compliance with Guidelines:
- Organizations must comply with IRS regulations regarding interested transactions, necessitating cross-references to IRS publications.
-
Record-Keeping:
- Maintaining comprehensive records of each transaction reported is essential for future audits and regulatory compliance.
By understanding these key elements, organizations can effectively navigate Schedule L and fulfill their reporting obligations.
Penalties for Non-Compliance with Schedule L
Failure to accurately complete and submit Schedule L can result in severe repercussions for tax-exempt organizations. The IRS has established penalties to address non-compliance, including:
-
Fines:
- Organizations may incur financial penalties for failure to file Schedule L or for filing incomplete or inaccurate information.
-
Loss of Tax-Exempt Status:
- Significant non-compliance may lead to the revocation of tax-exempt status, jeopardizing the organization’s operations and public support.
-
Increased Scrutiny:
- Inaccuracies can trigger additional scrutiny from the IRS, leading to audits and prolonged investigations into the organization’s financial practices.
To avoid these penalties, nonprofit organizations must prioritize compliance with Schedule L requirements by maintaining accurate records, ensuring timely filing, and seeking professional guidance when necessary.
