Form 990 Schedule L: Transactions with Interested Persons

Schedule L of Form 990 is the schedule tax-exempt organizations use to disclose financial dealings with insiders. It has four parts, each covering a different kind of transaction: excess benefit transactions (Part I), loans to or from interested persons (Part II), grants or assistance to interested persons (Part III), and business transactions with interested persons (Part IV). Whether you need to file it, and which parts you need to complete, is determined by the “yes” answers you give on Form 990 Part IV.

When You Have to File Schedule L

You don’t decide on your own whether Schedule L applies. Form 990 Part IV contains a checklist. Answer “yes” to any of these questions and the corresponding part of Schedule L must be completed and attached to your return:¹

Lines 25a or 25b (excess benefit transactions): complete Part I.
Line 26 (loans to or from interested persons): complete Part II.
Line 27 (grants or assistance to interested persons): complete Part III.
Lines 28a, 28b, or 28c (business transactions with interested persons): complete Part IV.

Form 990-EZ filers follow a similar process with fewer questions. If Part IV isn’t reviewed carefully every year, required disclosures get missed.

Who Counts as an Interested Person

The label shifts by part. Part I uses “disqualified person” under Section 4958 of the Internal Revenue Code. Part IV uses the broader “interested person,” which sweeps in additional roles. The underlying idea is the same: anyone in a position to steer the organization’s decisions or resources.

Under Section 4958, a disqualified person is anyone who could exercise substantial influence over the organization at any point during the five-year period ending on the date of the transaction.² The IRS cares about the capacity to influence, not whether it was actually used.³ Automatic categories include:

Voting board members — any director, trustee, or other governing body member entitled to vote on matters within the board’s authority.
Top officers — the president, CEO, COO, treasurer, CFO, or anyone with ultimate responsibility for management decisions or the organization’s finances, regardless of title.
Key employees — staff who manage a discrete segment of the organization, control a significant portion of its budget, or otherwise exercise broad administrative authority.

Family members are also disqualified. The Section 4958 family circle is wide: a spouse, brothers and sisters (including half-siblings), spouses of those siblings, ancestors (parents, grandparents), children, grandchildren, great-grandchildren, and the spouses of children, grandchildren, and great-grandchildren.⁴ So if your executive director leases office space from her brother-in-law’s company, the transaction likely triggers reporting.

Entities controlled by disqualified persons count too: a corporation where disqualified persons own more than 35 percent of the voting power, a partnership where they hold more than 35 percent of the profits interest, or a trust where they hold more than 35 percent of the beneficial interest.³ This prevents insiders from routing transactions through a side business to avoid disclosure.

Private Foundations Use a Different Definition

Section 4958 explicitly excludes private foundations.² Private foundations follow the self-dealing rules under Section 4941, and their disqualified persons are defined in Section 4946. That definition covers substantial contributors (anyone who donated more than $5,000, provided the amount exceeds 2 percent of the foundation’s total contributions), foundation managers, owners of more than 20 percent of entities that are substantial contributors, and certain government officials.⁵ If your organization is a private foundation, use the Section 4946 categories when completing Schedule L rather than the Section 4958 categories described in the rest of this article.

Part I: Excess Benefit Transactions

An excess benefit transaction happens when a disqualified person receives more value from the organization than the organization receives back. The classic example is compensation for a CEO that exceeds what comparable organizations pay for similar roles. The “excess benefit” is the gap between what the person received and the fair market value of what they provided.²

The penalties fall on the individual, not the organization. The disqualified person who received the excess benefit owes an initial excise tax of 25 percent of the excess amount. Any organization manager who knowingly approved the transaction faces a separate 10 percent tax on the same excess amount, capped at $20,000 per transaction.² The manager tax doesn’t apply if the participation wasn’t willful and resulted from reasonable cause.

If the disqualified person fails to correct the transaction within the “taxable period,” a second-tier tax of 200 percent of the excess benefit applies. The taxable period runs from the date of the transaction until the earlier of the date the IRS mails a notice of deficiency or the date it assesses the initial 25 percent tax.² Once the IRS formally acts, the correction window closes.

Part II: Loans

Part II captures every loan between the organization and an interested person. This includes formal promissory notes, salary advances, split-dollar life insurance arrangements treated as loans, and any other extension of credit. Each loan is reported separately regardless of amount.⁶ There is no minimum dollar threshold. A $500 salary advance to a board member requires the same disclosure as a $50,000 loan.

For each loan, report the name of the borrower or lender, their relationship to the organization, the original principal amount, the balance due, whether the loan is in default, whether the board approved it, and whether a written agreement exists. The IRS is looking at two things: whether the loan was approved by individuals without a conflict of interest, and whether the terms were commercially reasonable. A zero-interest loan to the executive director, approved only by the executive director, is the kind of arrangement that invites scrutiny.

Part III: Grants and Assistance

Part III discloses grants, scholarships, internships, and other forms of assistance provided to interested persons or their family members. Report the recipient’s name, relationship, the type of assistance, and the purpose and amount. The IRS uses this part to check that the selection process for these benefits was objective and that insiders didn’t steer awards to themselves or their relatives.

Part IV: Business Transactions

Part IV covers contracts, sales, leases, licensing agreements, insurance arrangements, service agreements, and joint ventures between the organization and an interested person or their 35-percent controlled entity.⁶ Unlike loans, business transactions have dollar thresholds. A business transaction is reportable if either:

Total payments between the organization and the interested person during the tax year exceeded $100,000, or
A single transaction exceeded the greater of $10,000 or 1 percent of the organization’s total revenue for the year.⁶

That second prong catches smaller organizations. If your nonprofit has $500,000 in revenue, the single-transaction threshold is $10,000. At $2 million in revenue, the threshold becomes $20,000 (1 percent of revenue). Growing organizations may trip the requirement at higher dollar amounts than they expect.

Exceptions to Part IV Reporting

Not every financial interaction with an insider requires Part IV reporting. The IRS carves out several exceptions:⁶

Transactions already reported elsewhere on Schedule L. Excess benefit transactions (Part I), loans (Part II), and grants (Part III) don’t get duplicated in Part IV.
Compensation reported on Form 990 Part VII. Pay for an officer or director disclosed in the compensation section doesn’t go in Part IV, unless the compensation was paid to a family member of someone listed on Part VII.
Routine banking. Deposits into or withdrawals from a bank account when the bank is an interested person, as long as the terms match what the bank offers the general public.
Membership dues. Standard membership dues charged to officers or directors.
Publicly traded companies. Transactions with a publicly traded company in the ordinary course of its business, on the same terms offered to the general public or on terms more favorable to the organization.

A common mistake is assuming any “ordinary course of business” transaction is exempt. That exception applies only to publicly traded companies and routine banking. A contract with a board member’s privately held consulting firm is reportable if it meets the dollar thresholds, no matter how routine it feels.

The Rebuttable Presumption of Reasonableness

Organizations can protect themselves against excess benefit claims by following a three-step process that creates a rebuttable presumption the terms are reasonable. When it’s used, the IRS bears the burden of proving the terms were excessive, rather than the organization having to prove they were fair.⁷ The three requirements:

Independent approval. The compensation or transaction must be approved in advance by an authorized body composed of people who have no conflict of interest in the outcome.
Comparability data. Before voting, the authorized body must obtain and rely on appropriate comparability data, such as compensation surveys from independent firms, pay levels at similarly situated organizations, or independent appraisals for property transfers.⁸
Concurrent documentation. The authorized body must document its decision at the time it is made, including the terms approved, who was present for the discussion and vote, the data relied upon, and the basis for the determination.

For smaller organizations with annual gross receipts under $1 million, the comparability data requirement is lighter: compensation data from three comparable organizations in the same or similar communities is enough.⁸ The most common failure is skipping the market research and the concurrent documentation. Boards approve executive pay informally, then can’t produce records when the IRS asks.

Correcting an Excess Benefit Transaction

Correction means putting the organization back in the financial position it would have been in if the disqualified person had acted under the highest fiduciary standards. In practice, that almost always means repaying the excess amount in cash, plus interest calculated at least at the applicable federal rate compounded annually from the transaction date to the correction date.⁹ Paying with a promissory note does not count as correction.

A disqualified person can also return specific property that was part of the original transaction, but only if the organization agrees to accept it. The returned property’s value is the lesser of its fair market value on the return date or its value on the date of the original transaction. If that amount falls short of what’s owed, the difference must be made up in cash.⁹ The disqualified person who received the excess benefit cannot participate in the organization’s decision about whether to accept the property back. And if the IRS determines the correction was structured to avoid the cash repayment requirement, it doesn’t count.

Filing, Deadlines, and Penalties

Schedule L is attached to Form 990 or Form 990-EZ. Since the Taxpayer First Act took effect, virtually all tax-exempt organizations must file electronically.¹⁰ The return is due on the 15th day of the 5th month after the close of the organization’s tax year. For calendar-year organizations, that’s May 15.¹¹

Form 8868 provides an automatic six-month extension. It must be filed by the original due date of the return, and any estimated tax owed must be paid at that time; the extension gives extra time to file, not extra time to pay.¹² A separate Form 8868 is required for each return being extended, and it cannot be used for the Form 990-N e-Postcard.

Missing the deadline or filing an incomplete return carries escalating penalties. For organizations with gross receipts under $1,208,500, the penalty is $20 per day, up to a maximum of $12,000 or 5 percent of gross receipts, whichever is less. For organizations above that threshold, it jumps to $120 per day, capped at $60,000.¹³

If the IRS issues a demand for a corrected return and the organization doesn’t comply, responsible individuals can face a personal penalty of $10 per day, up to $5,000 per return. These penalties apply to incomplete returns too, so a timely-filed Form 990 missing a required Schedule L can generate the same fines as a late return.

The most severe consequence is automatic revocation. An organization that fails to file any required return for three consecutive years loses its exemption on the due date of the third missed return.¹⁴ Reinstatement requires a new application, and the organization has no exempt status during the gap, so donations received in that period aren’t tax-deductible for the donors who made them.

1
Internal Revenue Service. Instructions for Schedule L (Form 990)
2
Office of the Law Revision Counsel. 26 USC 4958 Taxes on Excess Benefit Transactions
3
Internal Revenue Service. Disqualified Person – Intermediate Sanctions
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GovInfo. 26 CFR 53.4958-3 Definition of Disqualified Person
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Internal Revenue Service. IRC Section 4946 – Definition of Disqualified Person
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Internal Revenue Service. Instructions for Schedule L (Form 990)
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Internal Revenue Service. Rebuttable Presumption – Intermediate Sanctions
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eCFR. 26 CFR 53.4958-6 – Rebuttable Presumption That a Transaction Is Not an Excess Benefit Transaction
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eCFR. 26 CFR 53.4958-7 – Correction
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Internal Revenue Service. E-file for Charities and Nonprofits
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Internal Revenue Service. Exempt Organization Filing Requirements – Form 990 Due Date
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Internal Revenue Service. Instructions for Form 8868 (Rev. January 2026)
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Internal Revenue Service. Exempt Organizations Annual Reporting Requirements – Filing Procedures: Late Filing of Annual Returns
14
Internal Revenue Service. Automatic Revocation of Exemption