How to Fill Out and File Schedule K (Form 990): Bonds, Arbitrage, and Deadlines

Schedule K of Form 990 is the attachment where a 501(c)(3) organization reports its outstanding tax-exempt bond liabilities to the IRS. You must file a separate Schedule K for each qualifying bond issue that was issued after December 31, 2002 (including any refunding bonds) and had more than $100,000 in outstanding principal on the last day of your tax year.¹ The form runs six parts covering bond identification, use of proceeds, private business use, arbitrage, compliance procedures, and supplemental explanations. Each copy holds up to four issues; duplicate it if you have more.²

Who Has to File

You file Schedule K if your organization answered “Yes” on Form 990, Part IV, line 24a — meaning you had at least one qualifying bond issue on the books at year-end.¹ The obligation applies whether your organization issued the bonds itself or received the proceeds as a conduit borrower. In a conduit deal, a state or local government issues the bonds and loans the money to a nonprofit — often a hospital, university, or affordable housing developer — which is responsible for repayment. The government’s name is on the bond documents, but the organization that benefits from the proceeds is the one that reports on Schedule K.

Bonds that have been legally defeased, meaning the payoff funds are set aside in escrow and the debt is no longer your liability, do not count toward the $100,000 threshold.

What to Gather Before You Start

Most of the work on Schedule K happens before you open the form. Pull the bond closing binder for every qualifying issue, because you will need the following:

Issuer name and EIN, matching Form 8038, Part I, lines 1 and 2.²
The nine-character CUSIP for the bond with the latest maturity, matching Form 8038, Part I, line 9. Enter zeros if the bonds were not publicly offered and have no CUSIP.²
The issue date and issue price.
A short description of what the bonds financed.
Proceeds ledgers showing how bond money was allocated across capital projects, reserves, issuance costs, working capital, and unspent balances.
Leases, management contracts, and research agreements involving bond-financed property, along with the square-footage or time-use calculations that support your private business use percentages.
Arbitrage records: investment earnings on unspent proceeds, the bond yield, and any rebate payments already made on Form 8038-T.

The form itself is largely a matter of plugging in numbers and checking yes-or-no boxes. Those numbers depend on tracking that should have been running since the bonds closed. If it hasn’t, this is where the pain shows up.

Part I: Bond Issues

Part I is the identification table. Each row is one bond issue, with columns for the issuer’s name and EIN, CUSIP, issue date, issue price, purpose, whether any bonds have been defeased, and whether your organization acted as an “on behalf of” issuer or only as a conduit borrower.²

Check “Yes” in column (h) if your organization acted as the issuer. Check “No” if you simply borrowed the proceeds under a loan agreement with a governmental issuer. If any of the proceeds refunded a prior issue, include the original issue date of the refunded bonds in the purpose description. If your issue price on Schedule K differs from what was reported on Form 8038, explain the difference in Part VI.

Part II: Proceeds

Part II tracks every dollar from issuance through spending across 17 lines. The main groupings:

Line 1 reports the principal amount of bonds fully retired by year-end. Line 2 reports defeased principal set aside in escrow but not yet retired.
Line 3 reports total gross proceeds received as of year-end. If that number differs from the issue price in Part I (for example, because of investment earnings), explain the gap in Part VI.
Lines 4 through 6 cover amounts held in reserve funds, capitalized interest during construction, and refunding escrow accounts.
Lines 7 and 8 cover bond issuance costs (underwriting fees, trustee fees, bond counsel) and credit enhancement costs (bond insurance premiums, letter-of-credit fees).
Lines 9 through 11 cover working capital expenditures, capital expenditures for land, buildings, and equipment, and any other spending not captured above.
Line 12 reports unspent proceeds still on hand, excluding amounts already reported on lines 4, 6, and 11.
Lines 13 through 17 ask for the year the project was substantially completed, whether the issue involved refunding bonds, whether you have finalized the allocation of proceeds, and whether you keep books and records supporting that allocation.

The IRS is looking for internal consistency. The pieces should reconcile to the total on line 3. Where they don’t, Part VI is your safety valve.

Part III: Private Business Use

This is the hard part. Under IRC Section 141, a bond issue fails the private business use test if more than 10 percent of the proceeds go to any private business purpose. A separate 5-percent limit applies to private use that is unrelated or disproportionate to the governmental use the bonds financed.³

Part III asks whether any of the following arrangements existed for bond-financed property during the year:²

Line 1: partnership or LLC arrangements where your organization was a member alongside non-501(c)(3) entities that owned bond-financed property.
Line 2: any lease of bond-financed property.
Line 3a: any management or service contract that could result in private use, with line 3b asking whether you routinely had bond counsel review those contracts.
Line 3c: any research agreement that could result in private use, with a parallel bond counsel question on line 3d.
Lines 4 and 5: the average percentage of bond-financed property used by nongovernmental persons (line 4) and the percentage used in unrelated trade or business by the organization itself or by another 501(c)(3) or government unit (line 5).
Line 7: whether more than 5 percent of bond payments are secured by property or payments tied to a private business use.

Management Contract Safe Harbors

Not every management contract creates private business use. Revenue Procedure 2017-13 sets out safe harbors for contracts that meet specific conditions.⁴ Services that are merely incidental to the facility’s primary purpose — janitorial work, equipment repair, hospital billing — generally fall outside the private use rules. So does granting admitting privileges to physicians at a bond-financed hospital, as long as those privileges are available to all qualified doctors in the area.

The bright line: compensation cannot be based on a share of net profits from operating the facility. A contract paying the manager a percentage of net profits is treated as private business use regardless of other factors.⁴ Contracts limited to reimbursement of actual direct expenses plus reasonable overhead generally pass. Annual bond counsel review of your management contracts is not technically required, but line 3b asks whether you did it, which tells you what the IRS considers best practice.

Calculating the Percentages

Lines 4 and 5 want an average percentage across the measurement period, typically the bond’s term, not a year-end snapshot. Square footage, time-use logs, or a combination can support the calculation depending on the nature of the use. A hospital leasing space to a for-profit pharmacy or a university licensing lab space to corporate sponsors needs a systematic tracking process to produce defensible numbers.

Part IV: Arbitrage

When you invest unspent bond proceeds and earn more than the yield on the bonds themselves, the excess is arbitrage. Under IRC Section 148, you must rebate that excess to the U.S. Treasury to keep the bonds tax-exempt.⁵ The rebate equals what you actually earned minus what you would have earned at the bond yield.

Part IV asks whether you have filed Form 8038-T (the form used to make arbitrage rebate and yield reduction payments) and, if not, whether the rebate is simply not yet due, an exception applies, or no rebate is owed.⁶ The section also asks whether you satisfied the regulatory safe harbor for establishing the fair market value of any guaranteed investment contracts purchased with bond proceeds.

Arbitrage calculations are complex enough that most organizations hire a rebate consultant or their bond counsel to run the numbers. The first computation is generally due five years after the bond issue date, with subsequent calculations at five-year intervals until all proceeds are spent.

Parts V and VI: Compliance Procedures and Supplemental Information

Part V is a single question: has your organization established written procedures to identify federal tax violations in a timely way and correct them through the Voluntary Closing Agreement Program when self-remediation is not available?⁷ A “No” answer does not itself trigger a penalty, but it signals that the organization may lack the internal controls the IRS expects of a bond issuer or borrower.

The IRS expects those procedures to include regular due diligence reviews, a named official responsible for compliance, training for that person, retention of records substantiating how proceeds were spent, early detection of noncompliance, and a plan for timely corrective action.⁸

Part VI is open space for supplemental explanations. Use it to clarify any discrepancy between issue price and total proceeds, describe unusual spending arrangements, explain why a private use percentage is elevated, or add context for any “Yes” answer that might look concerning without it. A clear explanation here can head off an inquiry.

Deadline and How to File

Schedule K attaches to Form 990 and follows its deadline: the 15th day of the 5th month after your tax year ends. For calendar-year organizations, that is May 15.⁹ If you need more time, file Form 8868 for an automatic six-month extension, which pushes calendar-year filers to November 15.¹⁰

Form 990 must be filed electronically. The Taxpayer First Act eliminated paper filing for Form 990 and Form 990-PF for tax years ending July 31, 2020, and later.¹¹ Schedule K goes along with the electronic return as an attachment.

Records to Keep After You File

Keep everything that supports Schedule K for the life of the bond issue plus three years after the bonds are fully paid off, including any refunding bonds.¹² On a 30-year bond, that runs 33 years or more. The file should hold:

Bond closing transcripts, official statements, and loan agreements.
Form 8038 or 8038-G as originally filed.
Requisition records and bank statements showing how proceeds were drawn and spent.
Leases, management contracts, and research agreements involving bond-financed property.
Arbitrage rebate calculations and Form 8038-T filings.
Investment records for bond proceeds accounts.

Digitizing the file and assigning one person to maintain it is the simplest way to prevent gaps that turn into audit problems decades later.

What Happens If You File Late or Wrong

Late filing of Form 990 — including any attached Schedule K — triggers penalties that scale with organization size. For organizations with gross receipts under $1,208,500, the penalty is $20 per day the return is late, up to the lesser of $12,000 or 5 percent of gross receipts. Organizations with gross receipts above $1,208,500 face $120 per day, up to $60,000.¹³

Failing to file a required return for three consecutive tax years causes the organization to automatically lose its tax-exempt status.¹³ Errors or omissions on Schedule K itself can also draw scrutiny to the underlying bonds. If the IRS finds that proceeds were used in ways that violate federal tax rules — too much private business use, unrebated arbitrage, misallocated proceeds — the bonds can lose their tax-exempt status. That turns previously tax-exempt interest into taxable income for every bondholder and damages the organization’s future access to the municipal bond market.

Fixing a Compliance Problem Through VCAP

When you discover a bond compliance violation that self-remediation under Treasury regulations does not cover, the Tax Exempt Bonds Voluntary Closing Agreement Program is the path to resolution. The program, established by IRS Notice 2008-31, lets issuers and borrowers come forward voluntarily, disclose the violation, and negotiate a closing agreement that preserves the bonds’ tax-exempt status.¹⁴

To request an agreement, file Form 14429, which asks you to identify the IRC sections involved, describe the facts and circumstances, and propose a resolution.¹⁵ The submission must be signed under penalty of perjury by an authorized official with direct knowledge of the issue.

The program is not available if the bond issue is already under IRS examination, the tax-exempt status is being litigated or considered by IRS Appeals, or the IRS determines the violation resulted from willful neglect.¹⁴ When it does apply, a properly executed closing agreement protects bondholders from having to include bond interest in gross income for the period the agreement covers. Settlement terms vary with the severity and circumstances of the violation. Part V’s compliance-procedures question exists because the IRS wants those procedures in place before a violation surfaces, not after.

1
Internal Revenue Service. 2025 Instructions for Form 990
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Internal Revenue Service. Instructions for Schedule K (Form 990)
3
Office of the Law Revision Counsel. 26 U.S. Code 141 – Private Activity Bond; Qualified Bond
4
Internal Revenue Service. Rev. Proc. 2017-13
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Internal Revenue Service. Instructions for Form 8038-T
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Internal Revenue Service. Schedule K (Form 990) – Supplemental Information on Tax-Exempt Bonds
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Internal Revenue Service. Schedule K (Form 990)
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Internal Revenue Service. TEB Post-Issuance Compliance: Some Basic Concepts
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Internal Revenue Service. Annual Exempt Organization Return Due Date
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Internal Revenue Service. Form 8868
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Internal Revenue Service. E-File for Charities and Nonprofits
12
Government Finance Officers Association. Developing and Implementing Procedures for Post-Issuance Tax Compliance for Issuers of Governmental Bonds
13
Internal Revenue Service. Exempt Organizations Annual Reporting Requirements – Filing Procedures: Late Filing of Annual Returns
14
Internal Revenue Service. Notice 2008-31
15
Internal Revenue Service. Tax Exempt Bonds Voluntary Closing Agreement Program Request