If your organization has any complexity to its structure, you may be required to complete Schedule R. This schedule is used to report related entities and ownership in unrelated partnerships.
Definition of Related Entity
Two entities are related if they meet any of the following descriptions:
- One organization is the parent of the other - the parent controls* the filing organization
- An organization is the subsidiary of the filing organization - the filing organization controls the organization
- Brother/sister: two organizations controlled by the same person or persons
- Supporting/supported: one organization is, at any time in the tax year, a supporting organization of the filing organization within the meaning of Internal Revenue Code Section 509(a)(3); or a supported organization if the filing organization is a supporting organization
*control:
For a parent/subsidiary relationship: (1) the power to remove and replace (or appoint or elect) a majority of the nonprofit organization's or other organization's directors or trustees; or (2) a management or board overlap where a majority of the subsidiary organization's directors or trustees are trustees, directors, officers, employees, or agents of the parent organization
For a brother/sister relationship: the same persons constitute a majority of the members of the governing body in both organizations
For taxable entities: (1) ownership of more than 50 percent of the stock by voting power or value of a corporation; (2) ownership of more than 50 percent of the profits or capital interest in a partnership or LLC; (3) being a managing partner or managing member in a partnership or LLC that has three or fewer managing partners or managing members; (4) being a general partner in a limited partnership that has three or fewer general partners; (5) being the sole member of a disregarded entity; or (6) ownership of more than 50 percent of the beneficial interests in a trust
Schedule R Disclosures
Specific information must be provided for all related organizations and unrelated partnerships. It is important that you identify the information that you will need to disclose in advance of the preparation of the return. Each section asks for somewhat different information based on the type of related entity. The various parts to the schedule are:
Part I: Disregarded Entities
Part II: Related Tax-Exempt Organizations
Part III: Related Taxable Organizations Taxable as a Partnership
Part IV: Related Taxable Organizations Taxable as Corporations or Trusts
Part VI: Unrelated Organizations Taxable as a Partnership
Transactions with Related Organizations
Part V is devoted to disclosures regarding various types of transactions with related organizations. This section does not require disclosure of transactions with disregarded entities. However, for all other transactions with related organizations, you must disclose whether you engaged in the various types of transactions. If so, you must disclose the name of the other organization, the type of transaction, and the amount involved. Each transaction type (except interest, annuities, royalties, or rent from a controlled entity) has a $50,000 threshold per transaction type - i.e., if the total of all transactions of a transaction type between two organizations is less than $50,000, disregard those transactions in replying to the questions.
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It is important that you identify your reporting requirements for Schedule R early in the Form 990 preparation process. The responses for many of the other questions in the return depend heavily upon who is considered an organization related to your organization.