Investment Income on the Forms 990 and 990-EZ (Technical Note)

Investment income is calculated on Core and version 1 "Digitized Data" files for Form 990 filers as equalling the sums of lines 4, 5, and 7 (interest & savings on temporary cash investments, dividends and interest from securities, and other investment income, respectively). This was initially a definition used by the IRS in the creation of its Return Transaction Files.

Arguably, one could expand this with the inclusion of two or three more items: rental income (line 6a or 6c), sales of securities line 8c(A), and sales of other assets other than inventory (line 8c(B))

Rental Income

On EZ returns, the number is what is reported on line 4 ("investment income"). The EZ instructions explicitly state that this item includes "gross rental income." Thus, to make reporting on the EZ and 990 consistent, one might want to include this item for 990-filers also.

As of Sept. 2002, NCCS is still reviewing whether or not to add rental income (either gross or net) into the investment income field. There are reasons for either approach:

- To keep numbers consistent with prior years, best to leave the definition as is.

- To be true to the EZ definition, best to change it.

- The 990 instructions for line 6a specifically states that only rental income for INVESTMENT PROPERTY is to be reported on this line (not income related to an organization's exempt function). Thus, by definition, this is investment income.

- The EZ definitions don't really matter since very few, if any, EZ-filers have substantial rental income. (If they have total assets of greater than $250,000 they are required to file a Form 990. Thus, it is highly unlikely that EZ filers would have sufficient property to generate substantial rental income. Moreover, total gross receipts for EZ filers cannot exceed $100,000.)

Please keep in mind that rental income represents only a small fraction of total revenue. For 1999, gross rental income represented less than 1/2 of 1 percent of total revenue; net rental income represented only one-quarter.

Sales of Securities

One can invest in stocks and bonds for the purposes of receiving interest and dividends or to generate revenue from their sale if they increase in value. For purposes of calculating total investment income, the inclusion of net gain from sales of securities seems a sensible approach.

The use of gross sales is sometimes used. However, this leads to highly inflated numbers for some organizations that engage in frequent short-term trading of securities. Thus and organization with only $100,000 in securities that rolls over its portfolio four times a year would report $400,000 in gross revenue although the actual profit (net gain or loss) is likely to be much smaller (and could be negative).

Sales of Assets Other Than Inventory

Net revenue from sales other than securities and inventory (Column B of question 8) accounted for only 0.16% of total revenue in 1999. The gross revenue from this source was also less than 1% of total revenue.

The item includes includes items such as real estate, royalty interests, partnership interests, program-related investments, and fixed assets. Thus, it represents a mixture of investment and non-investment income. Moreover, the purchase of real estate, even if used for program operations, is an "investment," the sale of which should be included as investment income. For these reasons, we usually include it as investment income when comparing investment income and other earned income.

Added 09/19/2002 by tpollak, Modified 05/25/2006 by jauer


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