Schedule L Form 990: Transactions With Interested Persons

Schedule L of Form 990 is the attachment that tax-exempt organizations use to disclose financial transactions with “interested persons” — the officers, directors, key employees, their family members, and major donors who have influence over the organization. It has four parts covering excess benefit transactions, loans, grants, and business dealings, and it is required only when specific trigger questions on the parent Form 990 or Form 990-EZ are answered “yes.”

When Schedule L Is Required

Schedule L is not a standalone filing. It rides along with the annual return, and only when the return itself flags a reportable relationship.

For organizations filing the full Form 990, the trigger questions sit in Part IV, the Checklist of Required Schedules. Lines 25a and 25b send you to Schedule L, Part I (excess benefit transactions). Line 26 sends you to Part II (loans). Line 27 sends you to Part III (grants). Lines 28a through 28c send you to Part IV (business transactions).¹

Form 990-EZ filers have a narrower obligation. They complete Part I only if they answer “yes” to line 40b (excess benefit transactions) and Part II only if they answer “yes” to line 38a (loans). Parts III and IV do not apply to 990-EZ filers at all.²

If none of the trigger questions apply, you skip Schedule L. Answering “no” when the honest answer is “yes” does not solve the problem; it produces an incomplete return that can draw IRS scrutiny and administrative penalties.

Who Counts as an Interested Person

“Interested person” is a broad label, and the exact definition shifts depending on which part of the schedule you are completing.

Disqualified Persons (Part I)

For excess benefit transactions, the relevant category is the “disqualified person” under Internal Revenue Code Section 4958. This includes anyone who was in a position to exercise substantial influence over the organization at any time during the five-year lookback period before the transaction.³ Officers, directors, and trustees automatically qualify. So do key employees with reportable compensation above $150,000 who also meet specific responsibility criteria, such as managing a significant segment of operations.⁴

Family members are pulled in too: spouses, children, grandchildren, parents and other ancestors, and siblings. So are entities in which any disqualified person holds more than a 35% ownership interest. That last piece prevents insiders from routing benefits through companies they control.

Substantial Contributors (Part III)

For grants reported in Part III, the definition expands to include substantial contributors. A substantial contributor is anyone who has given more than $5,000 to the organization, provided that amount also exceeds 2% of total contributions received up to that point. Once someone crosses the threshold, the label sticks permanently, even if later giving from others pushes their share back below 2%.⁵

Business Transaction Parties (Part IV)

For Part IV, the net widens further. Former officers and directors are included, not just current ones. So are family members of anyone listed in Form 990, Part VII, Section A, along with entities in which any of those individuals hold more than a 35% interest. The point is to catch arrangements where former insiders or their relatives continue doing business with the organization after leaving leadership.

The Four Parts of Schedule L

Part I: Excess Benefit Transactions

An excess benefit transaction occurs when the organization gives a disqualified person an economic benefit worth more than what the organization received in return. Paying an executive well above market rates for comparable work is the textbook example. Part I asks for the disqualified person’s identity, a description of the transaction, and the dollar amount of the excess benefit. If correction has already happened, that gets documented too, along with the total excise tax incurred under Section 4958 whether or not the IRS has formally assessed it. Anyone who owes the tax separately files Form 4720 to report and pay it.²

Part II: Loans

Any loan between the organization and an interested person, in either direction, is reportable, with no dollar threshold. The schedule asks for the identity and relationship of the borrower or lender, the purpose and direction of the loan, the original principal and year-end balance (including accrued interest, penalties, and collection costs), whether the governing body or a committee approved the loan, whether a written promissory note exists, and whether the loan is in default.² These questions exist because a loan to an executive with no written agreement, no board approval, and a below-market rate can look a lot like an excess benefit dressed up as debt.

Part III: Grants and Assistance

Grants, scholarships, and other assistance provided to an interested person are reported in Part III, again with no minimum dollar threshold. The disclosure covers the recipient’s name, the relationship, the type of assistance, and the amount.⁶

Two narrow exemptions apply. Grants to employees of a substantial contributor (or their children) are exempt when awarded through an objective, nondiscriminatory process with pre-established criteria reviewed by a selection committee. Assistance provided to an interested person as part of a charitable class, such as disaster relief or poverty aid, is exempt if the terms match those offered to other members of the class. The charitable-class exemption does not cover travel grants, scholarships, fellowships, or similar merit awards.

Part IV: Business Transactions

Part IV is the one part of Schedule L with dollar thresholds. A business transaction with an interested person only needs to be reported if one of the following applies:⁶

All payments between the organization and the interested person during the tax year exceeded $100,000 in the aggregate.
Payments from a single transaction exceeded the greater of $10,000 or 1% of the organization’s total revenue for the year.
The organization paid more than $10,000 in compensation during the year to a family member of a current or former officer, director, trustee, or key employee listed on Form 990, Part VII.
The organization invested $10,000 or more in a joint venture in which both the organization and the interested person each held more than a 10% profits or capital interest at some point during the year.

If none of those apply, the transaction stays off Schedule L even when the counterparty is technically an interested person. Common examples that do land in Part IV include a board member’s consulting firm providing services to the organization, a director’s company leasing office space to the nonprofit, or purchases from a business owned by an officer’s relative. Reporting a transaction does not make it improper; it makes it visible so the IRS and the public can judge whether the terms were fair.

Excise Taxes and How to Avoid Them

The stakes on Part I are substantial. Section 4958 imposes a first-tier excise tax of 25% of the excess benefit on the disqualified person who received it. If the transaction is not corrected within the taxable period, a second-tier tax of 200% of the excess benefit follows.³

Managers are exposed as well. An organization manager who knowingly participates in an excess benefit transaction may owe a 10% excise tax, capped at $20,000 per transaction. That tax applies only when the 25% tax is also imposed, when participation was willful, and when it was not due to reasonable cause. Multiple managers involved in the same transaction share joint and several liability.⁷ The 200% second-tier tax can be abated if the disqualified person fully corrects the transaction within a 90-day correction period following the IRS notice.

The strongest defense against a Section 4958 challenge is the rebuttable presumption of reasonableness. When it applies, the IRS carries the burden of proving the transaction was an excess benefit rather than the organization having to prove it wasn’t. Three conditions must all be satisfied:⁸

The transaction is approved in advance by the board, a board committee, or another authorized body whose members have no conflict of interest.
The authorized body obtains and reviews appropriate comparability data before deciding — for compensation, that typically means salary surveys or data from similar organizations.
The body documents the basis for its decision at the time, including the terms, who was present, what data was reviewed, and how it was obtained. Records must be prepared before the later of the next board meeting or 60 days after the final action.

This is where organizations most often stumble. A board approves an executive’s pay but does not record the comparable data it reviewed, or the minutes fail to reflect the vote. Without all three elements, the presumption never attaches, and the organization loses its best protection in an audit.

Filing, Deadlines, and Public Disclosure

Schedule L is filed electronically as an attachment to Form 990 or Form 990-EZ. The Taxpayer First Act requires virtually all tax-exempt organizations to e-file their annual returns.⁹ The deadline is the 15th day of the 5th month after the close of the fiscal year, which is May 15 for calendar-year filers.¹⁰ Form 8868, filed by the original due date, buys an automatic six-month extension to file, though not to pay any tax owed.¹¹

Late filing without reasonable cause runs $20 per day for organizations with gross receipts under $1,208,500, capped at the lesser of $12,000 or 5% of gross receipts. Larger organizations pay $120 per day up to $60,000. These figures are adjusted periodically for inflation.¹²

Once filed, Schedule L is public. Tax-exempt organizations must make their annual returns, including all schedules and attachments, available for public inspection for three years from the later of the due date or the date actually filed.¹³ Most Form 990 returns land in nonprofit monitoring databases within weeks. Donors, journalists, watchdog groups, and prospective board members read them. An organization with extensive insider transactions on Schedule L should expect questions and should be ready to explain why each deal was conducted at arm’s length and on terms that served the mission.

1
Internal Revenue Service. Exempt Organizations Annual Reporting Requirements – Form 990 – Who Must File Schedule L
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Internal Revenue Service. Instructions for Schedule L (Form 990)
3
Office of the Law Revision Counsel. 26 USC 4958 – Taxes on Excess Benefit Transactions
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Internal Revenue Service. Key Employee Compensation Reporting on Form 990 Part VII
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eCFR. 26 CFR 1.507-6 – Substantial Contributor Defined
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Internal Revenue Service. Instructions for Schedule L (Form 990)
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Internal Revenue Service. Intermediate Sanctions – Excise Taxes
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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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Internal Revenue Service. E-file for Charities and Nonprofits
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Internal Revenue Service. 2025 Instructions for Form 990-EZ
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Internal Revenue Service. Instructions for Form 8868
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Internal Revenue Service. Late Filing of Annual Returns
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Internal Revenue Service. Public Disclosure and Availability of Exempt Organization Returns and Applications – Public Disclosure Overview