Understanding Net Assets in Form 990-EZ: What Nonprofits Get Wrong

Estimated reading time: 9 minute(s)

Form 990-EZ is the IRS short form for nonprofits with gross receipts under $200,000 and total assets under $500,000. It’s designed to be simpler, but as an IRS-authorized e-file provider that processes thousands of forms, we notice that the net assets section is one major area where small organizations make costly, recurring mistakes. Here’s what goes wrong and how to fix it.

What Are Net Assets?

In the simplest terms, net assets are a nonprofit’s equivalent of equity. Here’s the formula to use: Net Assets = Total Assets – Total Liabilities.

Assets are things of value owned (cash, property, inventory, receivables), and liabilities are obligations owed to others (loans, accounts payable, bonds).

On Form 990-EZ, you report net assets at the start and end of the tax year (Part I, lines 19-21; Part II). The difference between those figures must reconcile exactly with your revenue and expenses. When it doesn’t, problems follow.

4 Common Mistakes 

1. Reporting Cash Basis on the Balance Sheet 

Depending on your state, Form 990-EZ’s balance sheet (Part II) requires accrual-basis reporting under GAAP standards, even if you keep cash basis books internally. Reporting only your bank balance omits accounts receivable, prepaid expenses, deferred revenue, and outstanding grants, leaving your net assets understated and irreconcilable.

2. Misclassifying Net Asset Types 

Under ASC 958, net assets must be split into:

• Without donor restrictions – funds usable for any purpose 
• With donor restrictions – funds tied to a specific purpose or timeframe, which is determined by the donor.

A restricted $10,000 grant must be tracked separately and released only when the qualifying expense occurs. Misclassifying it as unrestricted can constitute misuse of funds.

3. Not Reconciling to the Prior-Year Return

The beginning net asset balance on your current return must match the ending balance on last year’s 990-EZ. Mismatches from restated financials, a new bookkeeper, or a software migration can raise IRS flags. If an issue is found on a prior year return, this can be reported on Part I line 20 as a Prior Period Adjustment.

4. Omitting In-Kind Contributions 

Donated goods must be recorded as assets at fair market value when received, with a matching entry to contribution revenue. Skipping this understates both assets and net assets.

Year-End Checklist 

Before filing, confirm:

• Accrual conversion – year-end adjusting entries are complete 
• Fund separation – restricted and unrestricted balances are tracked separately 
• Prior-year reconciliation – beginning balance matches last year’s ending balance 
• In-kind contributions – all donated assets are recorded at fair market value 
• Liability review – officer loans are classified as payables, not equity 
• Part I tie-out – change in net assets equals revenue minus expenses 

The Bottom Line 

Net assets aren’t just a compliance requirement; they’re a governance tool that tells your board the truth about your organization’s financial health. The mistakes above are common, but all of them are preventable. 

Interested in learning more about the Form 990-EZ? Find out more here.