Understanding Schedule L (Form 990 or 990-EZ): Transactions With Interested Persons

1. Introduction – What is Schedule L (Form 990 or 990-EZ)?

Schedule L (Form 990 or 990-EZ), officially titled “Transactions With Interested Persons,” is a mandatory compliance schedule administered by the Internal Revenue Service (IRS), an agency of the U.S. Department of the Treasury.

It is an annual attachment to Form 990 or Form 990-EZ. Tax-exempt non-profit organizations must complete Schedule L to disclose financial relationships, loans, grants, and business arrangements conducted between the non-profit and “interested persons” (such as current or former board members, officers, key employees, major donors, and their close family members).

2. Purpose of the Form – Why Does Schedule L Exist?

Tax-exempt organizations under Internal Revenue Code (IRC) Section 501(c) are created to serve public charitable purposes rather than private financial interests. Federal tax law strictly prohibits “private inurement” and “excess benefit transactions,” where non-profit funds or assets are improperly transferred to benefit organization insiders.

Schedule L exists to act as a financial transparency watchdog. It provides the IRS, state charity regulators, and the donating public with full visibility into potential conflicts of interest.

By requiring non-profits to detail self-dealing, insider loans, grants to board relatives, and commercial contracts with insider-owned companies, Schedule L enables the IRS to enforce “intermediate sanctions” excise taxes under IRC Section 4958 and verify that non-profit assets are protected.

3. Who Needs to File This Form

Schedule L (Form 990 or 990-EZ) is required when an organization answers “Yes” to specific insider transaction questions on Form 990 (Part IV, Lines 25a, 25b, 26, 27, 28a, 28b, or 28c) or Form 990-EZ (Part V, Lines 38a or 40b). You must file Schedule L if your non-profit engaged in any of the following during the tax year:

• Excess Benefit Transactions (Part I): Engaged in an excess benefit transaction subject to Section 4958 excise taxes involving a disqualified person.
• Loans To or From Insiders (Part II): Maintained an outstanding loan, line of credit, advance, or balance receivable with a current or former officer, director, trustee, key employee, or substantial contributor.
• Grants & Financial Assistance (Part III): Provided grants, scholarships, awards, or financial assistance to an interested person or family member.
• Business Transactions Involving Insiders (Part IV): Entered into direct or indirect business contracts (such as leases, sales, or consulting agreements) exceeding specific IRS monetary thresholds with an interested person or an entity in which an interested person holds a controlling interest.

4. Who Is Exempt / Not Required to File

Your non-profit organization is exempt or not required to complete Schedule L if its activities fall into any of these categories:

• No Insider Financial Transactions: Non-profits that had zero loans, grants, business contracts, or excess benefit transactions involving officers, directors, key staff, or major donors during the tax year.
• Fair Market Value Standard Transactions Below Thresholds: Business contracts conducted in the ordinary course of business that fall below IRS Schedule L reporting limits (such as single business transactions under $10,000, or total annual transactions under $100,000 or under 1% of gross revenue).
• Form 990-N (e-Postcard) Filers: Small non-profits (gross receipts ≤ $50,000) filing Form 990-N do not submit Schedule L.
• Private Foundations: Private foundations report self-dealing disclosures on Form 990-PF under Section 4941 rules rather than Schedule L.

5. When to File

Schedule L is an annual schedule attached directly behind Form 990 or Form 990-EZ, so it follows the exact filing deadline of the primary return.

The annual filing deadline is the **15th day of the 5th month** following the close of the organization’s accounting year (May 15 for calendar-year non-profits, or November 15 for fiscal years ending June 30). Non-profits can request an automatic 6-month extension by filing Form 8868 on or before the original due date.

6. Where and How to File

Schedule L cannot be submitted as a standalone document. It must be attached directly behind Form 990 or Form 990-EZ and submitted as part of your complete non-profit tax package.

Under the Taxpayer First Act, all tax-exempt non-profit returns (including Schedule L) must be filed electronically using IRS-approved tax software. Paper Form 990/990-EZ submissions are no longer accepted by the IRS.

7. Step-by-Step Instructions to Fill the Form

Schedule L consists of five parts that report excess benefit transactions, insider loans, grants, insider business contracts, and narrative details. The table below outlines the core sections on the schedule.

Form Section	Section Name	Instruction / Description
Part I	Excess Benefit Transactions	Report transactions where insiders received benefits exceeding fair market value, description, correction status, and Section 4958 tax details.
Part II	Loans To/From Interested Persons	Detail purpose, original principal, balance due, default status, board approval, and written agreement status for insider loans.
Part III	Grants or Assistance	List grants, scholarships, or financial assistance awarded to interested persons or their immediate family members.
Part IV	Business Transactions	Detail commercial contracts (leases, sales, consulting) exceeding IRS thresholds with interested persons or insider-controlled companies.
Part V	Supplemental Information	Provide required narrative explanations detailing transaction terms, board approval procedures, and financial corrections.

Detailed Filling Steps

1. Identify Interested Persons: Compile a complete list of current and former officers, directors, trustees, key employees, substantial contributors, and their family members, as well as entities in which they hold a 35% or greater ownership interest.
2. Report Excess Benefit Transactions (Part I): Disclose any transaction where an insider received unreasonable compensation or property exceeding fair market value. State whether the transaction was corrected and report Section 4958 excise taxes.
3. Detail Insider Loans (Part II): Report all outstanding loans, salary advances over $10,000, or notes payable to or from interested persons. Specify original principal, current balance due, whether the loan is in default, whether it was approved by the board, and whether a written promissory note exists.
4. Disclose Grants & Scholarships (Part III): List grants, scholarships, or financial assistance provided directly to interested persons or their family members, detailing the relationship and dollar amount.
5. Report Business Contracts (Part IV): Report commercial contracts with interested persons or insider-owned companies. List the person’s name, relationship, total transaction dollar amount, description, and state whether the transaction involved revenue sharing.
6. Provide Narrative Explanations (Part V): Use Part V to provide clear narrative disclosures detailing how contract prices were benchmarked and confirming board approval procedures.

8. Required Documents/Information Needed Before Filling

To ensure an accurate Schedule L filing, gather the following organizational and accounting records before preparing the form:

• Board Roster & Conflict-of-Interest Disclosures: Completed annual conflict-of-interest questionnaire statements from all current officers, directors, and key staff.
• Master List of Substantial Contributors: Records of major donors who contributed 2% or more of total organizational funding.
• Loan Agreements & Promissory Notes: Formal loan contracts, repayment schedules, and year-end interest ledgers for officer or board member loans.
• Vendor Contracts & Payment Ledgers: Invoices, leases, and service agreements involving companies owned or controlled by board members or staff relatives.
• Board Meeting Minutes: Minutes documenting board discussion, independent benchmarking, and approval of insider transactions.

9. Common Mistakes to Avoid

Errors on Schedule L can trigger automated IRS audits, severe excise taxes, and public scrutiny. Watch out for these frequent mistakes:

• Failing to Track Family & Business Relationships: Overlooking transactions involving an officer’s spouse, child, sibling, or a company where a board member owns a 35% stake.
• Omitting Unpaid Salary Advances: Forgetting to report employee salary advances or travel advances exceeding $10,000 as insider loans in Part II.
• Leaving Board Approval Columns Blank: Failing to check “Yes” or “No” in Part II regarding whether insider loans received independent board approval.
• Miscalculating Part IV Business Thresholds: Failing to report business contracts that exceed $100,000 or represent more than 1% of the non-profit’s gross revenue.
• Submitting as a Standalone Form: Attempting to e-file or mail Schedule L separately without attaching it to Form 990 or Form 990-EZ.

10. Penalties for Non-Filing or Errors

Engaging in unreported insider transactions or failing to submit Schedule L carries destructive legal and financial penalties:

• Section 4958 Intermediate Sanctions (Disqualified Person Excise Tax): An initial 25% excise tax is imposed on the insider who received an excess benefit. If the transaction is not fully corrected/repaid, a 200% penalty tax applies.
• Organization Manager Excise Tax: A 10% excise tax (up to $20,000 per transaction) is assessed individually on board members or managers who knowingly approved an excess benefit transaction.
• Return Rejection & Late-Filing Fines: Submitting Form 990 or 990-EZ without Schedule L when required causes the return to be rejected as incomplete, triggering daily fines ($20 or $105 per day).
• Revocation of Tax-Exempt Status: Severe or repeated private inurement transactions will cause the IRS to revoke the organization’s 501(c)(3) tax-exempt status.

11. Related Forms or Schedules

Non-profit leaders managing Schedule L (Form 990 or 990-EZ) frequently interact with these related federal tax forms:

• Form 990: Return of Organization Exempt From Income Tax.
• Form 990-EZ: Short Form Return of Organization Exempt From Income Tax.
• Form 4720: Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code (used to pay Section 4958 excise taxes).
• Schedule O (Form 990): Supplemental Information to Form 990 or 990-EZ.
• Form 8868: Application for Automatic Extension of Time To File an Exempt Organization Return.

12. Frequently Asked Questions

1. What is the primary purpose of Schedule L (Form 990 or 990-EZ)?

Schedule L is used by tax-exempt non-profits to disclose financial transactions, loans, grants, and commercial contracts involving interested persons (insiders, board members, key staff, and major donors).

2. Who qualifies as an “interested person” on Schedule L?

An interested person includes current or former officers, directors, trustees, key employees, substantial contributors, family members of these individuals, and business entities where these individuals hold more than a 35% controlling interest.

3. What is an excess benefit transaction under Section 4958?

An excess benefit transaction occurs when a tax-exempt organization provides an economic benefit to an insider (such as excessive compensation or overvalued property purchases) that exceeds the fair market value of the services or property received in return.

4. Can a non-profit lend money to an officer or board member?

While federal tax rules require insider loans to be reported on Schedule L Part II, many state non-profit corporation laws explicitly prohibit loans to directors and officers. Always consult state law before issuing insider loans.

5. What business transaction thresholds trigger Schedule L Part IV reporting?

Part IV reporting is triggered if direct or indirect business transactions with an interested person exceeded $100,000, or exceeded $10,000 for specific single transactions, or represented more than 1% of the non-profit’s annual gross revenue.

6. Can Schedule L be filed on paper?

No. Federal law mandates that Schedule L must be e-filed electronically attached to Form 990 or Form 990-EZ using approved tax software.

13. Conclusion – Key Takeaways

Schedule L (Form 990 or 990-EZ) is a vital governance and financial disclosure schedule for tax-exempt non-profit organizations. By providing complete transparency regarding insider loans, grants to board relatives, commercial contracts with insider-owned firms, and excess benefit transactions, Schedule L protects non-profit assets and proves that the organization operates for the public good. To avoid severe IRC Section 4958 excise taxes and protect your 501(c)(3) tax exemption, collect annual conflict-of-interest statements from all board members, maintain formal board approval minutes for insider arrangements, and e-file Schedule L alongside Form 990 or Form 990-EZ by the 15th day of the 5th month.