Tax Brief: Form 990, Schedule L: Transactions with Interested Persons

The IRS Form 990 Schedule L is used to disclose certain types of transactions between a not-for-profit organization and interested persons. These transactions include excess benefits transactions, loans, grants or other assistance, and business transactions. This schedule is also used determine whether a board member is independent. If a board member or their family member are a part of any transaction reported on Schedule L, then the board member is not considered to be independent.

Transactions reported in Part I may result in tax and penalties if not corrected. Transactions reported in Parts II through IV are informational only, but are subject to more scrutiny from the IRS. Organizations should make a reasonable effort to identify transactions with interested persons to ensure Schedule L is complete. If a transaction can be reported in two parts, the transactions should be reported in the first applicable part of Schedule L.

Each part of Schedule L has a different definition of interested persons, which is detailed in each section below. For the purposes of Parts II through IV, an interested person does not include a Section 501(c)(3) organization, an exempt organization with the same tax-exempt status as the filing organization, or a governmental unit. 

Part I – Excess Benefit Transactions

Part I discloses excess benefit transactions that took place during the tax year between the organization and interest persons. This section is only required to be completed by Section 501(c)(3), 501(c)(4), or 501(c)(29) organization if they have entered into an excess benefit transaction. An excess benefit transaction is one in which the economic benefit provided by the organization to a disqualified person exceeds the value of the consideration received. In order to prevent excess benefit transactions, organizations can implement certain guidelines and practices, such as having a compensation committee, soliciting bids, and documenting sales.

Examples of excess benefit transactions include, but are not limited to:

• Unreasonable compensation paid to a disqualified person
• The sale of property to a disqualified person for less than the fair market value
• Purchase of property from a disqualified person for more than the fair market value
• An expense reimbursement under a nonaccountable plan
• The payment of personal expenses of a disqualified person

An interested person for the purposes of Part I include:    

• A person in a position to exercise substantial influence over the Organization’s affairs for the past five years, including those as part of a supporting organization (generally, voting board members, president, treasurer, CEO, CFO, and COO)
• A donor or donor advisor to a donor advised fund
• An investment advisor of a donor advised fund sponsoring the organization
• A family member of the above
• A 35% controlled entity of the above and their family members

Part II – Loans to and/or from Interested Persons

Part II discloses loans outstanding at the end of the organization’s tax year between the organization and interest persons. This includes demand loans, advances under a nonaccountable plan, salary advances, and other receivables/payables. The total balance reported should include all principal, interest, and fees.  

An interested person is, for the purposes of Part II include:    

• A current or former trustee, director, officer or key employee
• A creator or founder of the organization
• A substantial contributor required to be reported on Schedule B for the filing year
• A family member of the above
• A 35% controlled entity of the above

Exceptions to reporting in Part II include: 

• Advances under an accountable plan
• Pledges receivable that would qualify as charitable contributions when paid
• Accrued but unpaid compensation owed by the organization
• Receivables outstanding that were created in the ordinary course of the organization’s business on the same terms offered to the general public

Part III – Grant or Assistance Benefitting Interested Persons

Part III discloses grants or other assistance of any amount provided by the organization to any interested person during the tax year. This includes providing goods or services or use of facilities, scholarships, fellowships, internships, prizes, and awards. However, grants that are awarded to an interested person on an objective and nondiscriminatory basis based on pre-established criteria and reviewed by a selection committee are not required to be reported. Additionally, schools are only required to report the totals of each type of assistance provided, rather than reporting the individual transactions with interested persons.

An interested person includes all of the same people as Part II, as well as:

• A member of the organization’s grant selection committee
• A family member of the above
• A 35% controlled entity of the above
• An employee (or the employee’s child) of a substantial contributor
• A 35% controlled entity of a substantial contributor

Part IV – Business Transactions Involving Interested Persons

Part IV discloses businesses transaction involving interested persons that were initiated during the tax year or are ongoing from prior years. This includes, but is not limited to, contracts for performance of services, sharing of paid employees, exchange of assets, loans that were entered into and paid off during the year, and joint ventures. Transactions that are reported in this section should have approval from the board of directors.

An interested person includes all of the same people as Part II, as well as:

• A management company that in the last five tax years had a former organization trustee, director, officer or key employee as an officer, director, trustee, or a direct or indirect 35% owner

Part IV is the only part of Schedule L that has reporting thresholds. Business transaction with interested persons should be disclosed on Schedule L if they meet any of the following thresholds:

• All payments during the year from a single transaction exceed the greater of $10,000 or 1% of the organization’s reportable revenue
• Total payments during the year for all transactions exceed $100,000
• Compensation payments to a family member of a current or former trustee, director, officer of key employee exceed $10,000
• In the case of a joint venture, the organization invested $10,000 or more (whether or not during the tax year) and the profits of the organization or interested person each exceeds 10% at any point during the tax year

In summary, Schedule L is complex and includes important information to report to the IRS. Not-for-profit organizations should have systems in place to capture information for transactions with interested persons in order to ensure the Form 990, Schedule L is completed accurately.