IRS Instruction 990 or 990-EZ (Schedule L) – In the complex world of tax-exempt organizations, transparency is key to maintaining compliance with IRS regulations. Schedule L (Form 990 or 990-EZ), titled “Transactions with Interested Persons,” plays a crucial role in disclosing financial dealings that could raise questions about conflicts of interest. This schedule helps the IRS and the public ensure that nonprofits, charities, and other exempt entities operate in the best interest of their missions rather than benefiting insiders disproportionately.
Whether you’re a board member, accountant, or executive director preparing Form 990 or 990-EZ, understanding the IRS instructions for Schedule L is essential to avoid penalties and maintain your organization’s tax-exempt status. In this SEO-optimized guide, we’ll break down the definitions, reporting requirements, exceptions, and more, drawing from the latest IRS resources. Let’s dive into the details to help you navigate these requirements confidently.
Who Must File Schedule L and Why It’s Important
Schedule L is required for organizations filing Form 990, “Return of Organization Exempt From Income Tax,” or the shorter Form 990-EZ. It’s specifically designed to report certain financial transactions or arrangements between the organization and “interested persons,” such as insiders who might have influence over decisions.
The primary purpose is to promote accountability. By disclosing these transactions, organizations demonstrate that they’re not providing undue benefits to disqualified persons under section 4958 of the Internal Revenue Code or engaging in deals that could jeopardize their exempt status. This schedule also helps determine if a governing body member qualifies as independent, which is vital for governance best practices.
If your organization is a section 501(c)(3), 501(c)(4), or 501(c)(29) entity, pay close attention—certain parts apply only to these groups. Filing inaccurately can lead to excise taxes, audits, or even revocation of tax-exempt status, making accurate reporting non-negotiable.
Key Definitions: Who Qualifies as an Interested Person?
Before diving into the parts of Schedule L, it’s critical to understand who counts as an “interested person.” The IRS provides specific definitions to identify potential conflicts:
- Disqualified Persons (for Part I): Individuals in a position to exercise substantial influence over the organization, as defined under section 4958. This includes voting board members, top executives, and substantial contributors.
- Interested Persons (for Parts II–IV):
- Current or former officers, directors, trustees, or key employees (listed on Form 990, Part VII, or Form 990-EZ, Part IV). For management companies, include former insiders from the last five tax years.
- The organization’s creator or founder, including sponsors of Voluntary Employees’ Beneficiary Associations (VEBAs).
- Substantial contributors: Those donating $5,000 or more in the tax year, reportable on Schedule B.
- Members of grant selection committees (for Part III).
- Family members of the above individuals.
- Entities controlled 35% or more by the above persons or organizations.
- For Part III, employees or their children of substantial contributors or controlled entities, if the grant was directed by or funded for their benefit.
Important note: Certain entities like other 501(c)(3) organizations, governmental units, or foreign equivalents aren’t considered interested persons. Always use reasonable efforts, such as annual questionnaires, to gather this information from potential interested parties.
Breaking Down the Parts of Schedule L
Schedule L is divided into four parts, each focusing on different types of transactions. Organizations must report all relevant dealings, regardless of amount in most cases, using specific columns for details like names, relationships, amounts, and descriptions.
Part I: Excess Benefit Transactions
This section is mandatory for 501(c)(3), 501(c)(4), and 501(c)(29) organizations. Report any “excess benefit transaction,” where the organization provides a benefit to a disqualified person exceeding the value of services or goods received in return—essentially, an unfair deal.
- What to Report: All such transactions, including compensation, property transfers, or other benefits.
- Columns: (a) Name of disqualified person (or anonymized as “substantial contributor”); (b) Relationship; (c) Description; (d) Correction status.
- Additional Requirements: Use Line 2 to report excise taxes under section 4958, filed on Form 4720. Identify organization managers in Part V.
Failure to correct these can trigger hefty penalties, so prompt action is advised.
Part II: Loans to and From Interested Persons
Disclose all outstanding loans, advances, or receivables involving interested persons at the tax year-end.
- What to Report: Salary advances, split-dollar life insurance arrangements, and any loans transferred during the year.
- Columns: (a) Name; (b) Relationship; (c) Purpose; (d) Direction (“To” or “From”); (e) Original amount; (f) Balance due (must align with Form 990 balance sheet); (g) Default status; (h) Board approval; (i) Written agreement.
- Tips: Report each loan separately. Balances should match Form 990, Part X, lines 5, 6, or 22.
Exceptions include accountable plan advances and standard bank loans on public terms.
Part III: Grants or Assistance Benefiting Interested Persons
Report any grants, scholarships, discounts, or other assistance provided to interested persons.
- What to Report: All benefits, including non-cash assistance like facilities or prizes.
- Columns: (a) Name; (b) Relationship; (c) Amount; (d) Type; (e) Purpose.
- Special Rules for Schools: Aggregate need-based scholarships without naming recipients if privacy laws like FERPA apply.
Exclude objective employee grants or assistance to charitable class members on equal terms.
Part IV: Business Transactions Involving Interested Persons
This covers contracts, joint ventures, sales, leases, or services with interested persons exceeding certain thresholds.
- Thresholds: Report if payments > $100,000 total, single deals > $10,000 or 1% of revenue, family compensation > $10,000, or joint ventures with $10,000+ investment and >10% interest.
- Columns: (a) Name; (b) Relationship; (c) Amount (cash or fair market value); (d) Type; (e) Revenue-sharing indicator.
- Aggregation: Combine multiple transactions or list them individually.
Exceptions apply for standard compensation, bank deposits, or public company deals on favorable terms.
Exceptions and Non-Reportable Transactions
Not every transaction needs reporting. Key exceptions include:
- Inability to obtain info after reasonable efforts.
- Accountable plan reimbursements.
- Standard public-term loans or deposits.
- Compensation reported elsewhere on Form 990.
- Grants to employees on objective, nondiscriminatory bases.
- Transactions with publicly traded entities under normal conditions.
Review the full list in the IRS instructions to ensure you’re not over- or under-reporting.
Penalties for Non-Compliance
Mistakes on Schedule L can be costly. Organizations must file Form 4720 for excess benefit taxes, with penalties under IRC Chapters 41 and 42 for failures. Uncovered excise taxes can reach 200% of the excess benefit, plus interest. Always consult a tax professional to mitigate risks.
Recent Updates to Schedule L Instructions
The current instructions (Rev. December 2024) are in a continuous-use format, applicable for tax year 2024 and beyond until superseded. As of early 2026, no major revisions have been announced, but check the IRS website regularly for changes. This format streamlines updates, focusing on clarity for filers.
Tips for Compliance and Best Practices
To ace your Schedule L filing:
- Implement annual conflict-of-interest questionnaires.
- Maintain detailed records of all transactions.
- Use software or consult CPAs familiar with nonprofit tax forms.
- Review IRS resources like the Form 990 instructions for cross-references.
By staying informed and transparent, your organization can focus on its mission without tax headaches. For the full details, download the official IRS PDF instructions. If you have specific questions, consider reaching out to a tax advisor tailored to exempt organizations.