Tax Brief: Form 990, Schedule R – Related Organizations and Unrelated Partnerships
The IRS Form 990, Schedule R is designed to provide information about related organizations, certain transactions with related organizations, and certain unrelated partnerships through which the organization conducts significant activities. This article will explore the relevant reporting requirements for each section of Schedule R and the related information that must be tracked in order to be reported.
Part I – Identification of Disregarded Entities
The first part of the schedule must be completed when the organization owns 100% of an entity disregarded as separate from the organization under Regulations sections 301.7701-2 and 301.7701-3. In short, a disregarded entity is treated as a branch or division of its parent organization for federal tax purposes. The financial and other information applicable to the disregarded entity must be reported on Form 990 as the parent organization’s information with the exception of select sections of the Form 990 and on Schedule R. Information about disregarded entities, including total income and end-of-year assets, must be reported in Part I or Schedule R.
Part II – Identification of Related Tax-Exempt Organizations
This part of the schedule must be completed when the filing organization has a relationship with a related tax-exempt organization and also includes governmental units and foreign governments. Related organizations include but are not limited to 1) a parent organization that controls the filing organization, 2) a subsidiary organization controlled by the filing organization, 3) brother/sister organizations controlled by the same person or persons that control the filing organization, and 4) supporting/supported organizations. Information about related tax-exempt organizations must be reported in Part II, including the organization’s exempt code section and public charity status, if applicable.
Parts III and IV – Identification of Related Taxable Entities
Organizations must also disclose information about related taxable entities such as partnerships, corporations, and trusts. Most of the information needed to complete these parts should be derived from the Schedule K-1 received for each respective partnership, shareholder, or trust interest. In cases where the Schedule K-1 isn’t available, the organization should provide a reasonable estimate of the required information. Financial information for related taxable entities — including the organization’s share of total income and share of end-of-year assets — must be reported. For Partnership interests, unrelated business income is reported on Schedule K-1, box 20 using code “V”. However, it should be noted that a section 501(c)(3) organization that holds ownership in an S corporation must treat all allocations of income from the S corporation as unrelated business income, including gain on the disposition of stock.
Part V – Transactions with Related Organizations
Certain types of transactions between the filing organization and related tax-exempt organizations and/or taxable entities must be reported in Part V. Note, this does not include transactions with disregarded entities. This is because disregarded entities are already required to be reported as part of the parent organization’s information as noted in above (Part I). In addition to disclosing the types of transactions with related organizations, the name of the related organization, amount involved, and method of determining the amount involved must be reported for certain transactions with a controlled entity of the filing organization.
Part VI – Unrelated Organizations Taxable as Partnerships
Certain information for unrelated partnerships must be reported when 1) the filing organization was a partner of the unrelated partnership at any time during the filing organization’s tax year and 2) the filing organization conducted more than 5% of its activities through the unrelated partnership. The 5% activities threshold is based on the greater of the filing organization’s total assets at the end of its tax year or its total revenue for its tax year. Financial information for unrelated partnerships including the organization’s share of total income and share of end-of-year assets must be reported.
In Closing
Form 990, Schedule R provides users with important information about the filing organization’s relationships and transactions with other entities. The IRS-published instructions should always be reviewed when preparing Schedule R as these instructions contain important definitions and examples that can serve as a resource to help ensure Schedule R of the Form 990 is prepared accurately.
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