If your organization is exempt under section 170(b)(1)(A)(vi), section 170(b)(1)(A)(iv) or section 509(a)(2) of the IRS code, it must annually meet one of two public support calculation tests (shown on Form 990, Schedule A) to maintain its publicly supported status:
- The organization is over 33 1/3% publicly supported. This means that 33 1/3% or more of an organization’s income comes from contributions given by other publicly supported organizations, governmental units, or the general public who individually gives less than 2% of the organization’s total contributions.
- The organization receives more than 33 1/3% of its income from contributions and other activities related to its exempt function and no more than 33 1/3% of income from gross investment income.
Both tests are calculated using a five-year period of data to create an average. Failure to meet one of these two tests could result in an organization losing its publicly supported status and reverting to a private foundation. So then what?
Identify Unusual Grants
Many small to mid-size organizations could run into trouble meeting these percentages as the pandemic continues. A large (or larger) grant from a non-publicly supported organization or individual could reduce the public support percentage with the donation staying in the public support calculation for five years unless it qualifies as an unusual grant.
Several factors need to be met to qualify a contribution as an unusual grant. While unusual grants are determined based on a variety of facts and circumstances, they generally must meet the following criteria to qualify:
- The grant is from a disinterested person
- The grant is unexpected or unusual in size
- The grant is attached by the publicly supported nature of the organization
- The grant, by reason of size, would result in the organization not meeting its public support test
Facts and Circumstances Test
After removing any unusual grants, an organization’s public support percentage may still fall below 33 1/3% but above 10%. If this happens, the organization may qualify for the facts and circumstances test. Using this test, an organization may establish that it normally receives a substantial part of its income from public sources, either governmental organizations or the general public, and still may qualify as a public charity.
Part VI of the Schedule A is used to describe what facts and circumstances are being used to continue to qualify an organization as publicly supported. This test is a subjective request to the IRS, which may or may not grant the request. While not guaranteed, the IRS has typically granted requests that appear to be reasonable.
Change in Status
If an organization fails the 33 1/3% test two years in a row without meeting the facts and circumstance test, or if it falls below the 10% threshold, the organization is automatically converted to a private foundation with a five-year waiting period before it can apply for public charity status again.
If you have questions regarding your public support calculation, please contact your local Blue & Co. advisor for assistance.