Demystifying the Schedule A Public Support Test

At a glance

• The main takeaway: Schedule A, Public Charity Status and Public Support, can take many nonprofit organizations by surprise, causing them to lose their public charity status if they do not keep a watchful eye on their public support test.
• Impact on your business: With proper planning and forethought, many public charities can refrain from being recast as a private foundation.
• Next steps: Aprio’s Nonprofit team can review your current position, recommend any changes you need to make and help you prepare as early as possible. Schedule a consultation with us today to get started.

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The full story:

Schedule A, Public Charity Status and Public Support, can take many nonprofit organizations by surprise, causing them to lose their public charity status if they do not keep a watchful eye on their public support test. However, with proper planning and forethought, many public charities can refrain from being recast as a private foundation. While Schedule A is applicable for twelve different types of public charities, this article is going to focus on the public support tests and thus on the following:

• Part II – Support Schedule for Organizations Described in Sections 170(b)(1)(A)(iv) and 170(b)(1)(A)(vi)
• Part III – Support Schedule for Organizations Described in Section 509(a)(2)

What is the public support test?

There are two public support tests for public charities: one for organizations described in sections 509(a)(1) and 170(b)(1)(A)(vi), and one for organizations described in section 509(a)(2). Both tests measure public support over a five-year period. The 509(a)(1) test requires that the organization either receive at least one-third of its support from contributions from the general public or meet the 10% facts and circumstances test, which will be discussed below.

The 509(a)(2) test requires that the organization receive more than one-third of its support from contributions from the general public and/or from gross receipts from activities related to its tax-exempt purposes. Under the 509(a)(2) test, an organization can receive no more than one-third of its support from gross investment income and unrelated business taxable income.

Purpose of the public support test

Schedule A distinguishes public charities from private foundations. Parts II and III require public support information for public charities whose status depends on their amount of public support (organizations described in sections 170(b)(1)(A)(iv), 170(b)(1)(A)(vi), and 509(a)(2)). The IRS seeks to limit public charities from being funded by a small number of substantial donors by requiring that at least 33 1/3% of their revenue is from the general public (including governmental agencies).

Additionally, organizations that file Part III must also have an investment income percentage that does not exceed 33 1/3%. The calculation for both tests is based on five years of revenue. If an organization is in their first five years as a 501(c)(3), the schedule is still required but the public support percentage is not calculated nor included in the tax return until year six.

How is the public support percentage calculated?

The public support test in Part II and Part III are calculated differently. At its most basic level, it is dividing an organizations public support by total support. However, each part has different requirements as to what is an isn’t included in both the numerator and the denominator. For example, under the Part II public support test, an organization can exclude an unusual grant from the test, which creates a planning opportunity. If an organization is in conversations with a large donor, Aprio can demonstrate how a large one-time gift, that can be considered an unusual gift, has on the public support test versus how the calculation looks is the donor spreads out their large donation over a number of years.

What happens when an organization fails the public support test?

Schedule A presents the public support percentage of the two most recent years, calculated on date from a five year period. If the organization meets the 33 1/3% threshold for one of the two years, it’s in the clear. If the organization presents two years of public support percentages below the 33 1/3% threshold, there are some options:

• Determine if the organization qualifies for the 10% facts and circumstances test.
• Determine if the organization qualifies to file an alternative part (between Part II and Part III) and passes the test.
• Determine if the organization could be restructured to a different type of public charity, such as a supporting organization.

If none of these options are available, the organization will no longer be considered a public charity and will be required to file Form 990-PF as a private foundation. Private foundations have different rules and regulations including less favorable charitable contribution limits and excise tax on investment income.

The facts and circumstances test for public charities under sections 509(a)(1) and 170(b)(1)(A)(vi) of the code

If your organization is completing the Part II test and receives more than 10%, but less than 33 1/3%, of its support from the general public or a governmental unit, your organization may attempt to qualify as a public charity if it can establish that it normally receives a substantial part of its support from governmental units, other public charities, or the general public. To establish this support, your organization should provide a description of the facts and circumstances which establish that your organization is essentially an organization that is publicly supported in that you serve the public interest, have a board that represents the community and that you have a plan to increase public support moving forward.

Key takeaways

• A public charity that qualifies to file, and files, Form 990-N is not required to file Schedule A (or any other part or schedule of Form 990 or 990-EZ) but should monitor its public support if its public charity status depends on public support.

• There will be cases where your organization will receive or is expected to receive a gift that is very significant to the organization, and this could impact Schedule A. However, your organization may benefit from spreading this gift out over many years or taking it all at once.
• The public support test that your organization is using can change depending on your circumstances. Your organization may choose the public support test that best reflects your sources of support and that results in your retaining your public charity status. The IRS does not require you to complete the public support test based on your determination letter.

The bottom line

If your organization no longer qualifies for public charity status and might be converted to a private foundation, is expected to receive gifts that can impact Schedule A, has changes in the public support test, and experienced a decrease in public support percentage, Aprio’s Nonprofit team can discuss the necessary changes you need to make and help you prepare as early as possible. Schedule a consultation with us today to get started.

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