For many public charities, the Schedule A support test is arguably one of the most important parts of Form 990—which is how the IRS provides the public with information on a not-for-profit’s revenue sources. That’s because any organization that doesn’t meet the public support test risks losing its status as a public charity.
In this scenario, the organization would still be tax exempt, but converted to a private foundation. For organizations described in Internal Revenue Code Section 170(b)(1)(a)(iv) or 170(b)(1)(a)(vi) that complete the support test on Part II of Schedule A, there are two chances to pass it.
To maintain their status, organizations must normally first pass the 33 1/3% support test by demonstrating at least a third of their total financial support comes from the public. That threshold is crucial because it provides a bright-line standard for an organization to meet. If an entity fails to meet that test, however, it can still retain its public charity status through the more subjective 10%-facts-and-circumstances test.
How It Works
To fulfill the 10%-facts-and-circumstances test, an organization must explain how it meets the various criteria on Part VI of Schedule A of Form 990. The requirements to pass the test are detailed in Treasury Regulation 1.170A-9(f)(3).
There are two main criteria required for each organization using the test:
- 10% of an organization’s support must come from government units, the general public, or from a combination of the two
- An entity must show that it’s able to attract new public or government support on a continuous basis
An organization can meet the second requirement by maintaining a program to solicit funds from the public or by holding activities that will garner support from government bodies and other not-for-profit organizations.
If each of these two criteria aren’t met, an organization won’t pass its public support test for the year.
Other Determining Factors
The Internal Revenue Service also evaluates several other factors to determine if an organization is publicly supported; however, not all of the factors need to be met. The purpose of the organization and the length of time it has existed may also affect how these factors are weighted.
Percentage of Financial Support
If an organization’s public support is closer to the 33 1/3% level, it won’t have to rely as much on demonstrating it’s publicly supported through other determining factors. If an entity’s support is closer to 10%, however, more scrutiny will be placed on the other factors.
An organization’s public support may be low, for example, because most of its support comes from investment income from its endowment funds. But if a government unit or the general public contributed those endowment funds, that would be evidence that the organization is publicly supported.
Sources of Support
It’s best if an organization can demonstrate that its public support comes from the government or from a representative number of people, rather than only the members of a single family. In looking at sources of support, the IRS also considers how long an organization has existed or whether its activities appeal only to a particular community or field of interest.
Representative Governing Body
It’s for the best if an organization’s governing body represents the broad interests of the public, rather than the private interests of a small number of donors. Such a governing body could include members who are:
- Public officials
- People appointed by public officials
- Community leaders
- People having special knowledge or expertise in the field related to the organization
- People elected by a broadly-based membership (if it is a membership organization)
Availability of Public Facilities or Services and Public Participation
If an organization provides facilities or services directly for the benefit of the public on an on-going basis it’s more likely to be considered publicly supported. Examples cited in the regulations include a library whose facilities are open to the public, a symphony that gives public performances, and a research institution that regularly publishes scholarly studies widely used by universities or the general public.
An organization is also more likely to be considered publicly supported if any or all of the following is true:
- Public officials, community leaders, or people with special knowledge or expertise participate in or sponsor the organization’s programs
- The organization maintains a specific program to accomplish its charitable work in the community
- A significant part of the organization’s funds is sourced from a government unit or public charity and the organization is held accountable as a condition of the grant or contribution
Special Considerations for Membership Organizations
Additional criteria can be used by membership organizations to show they’re publicly supported, such as:
- The organization aims to enroll as members a substantial number of people in the community or a particular field of interest
- Individual dues are affordable to a broad cross section of the interested public
- The organization’s activities appeal to people having a broad common interest or purpose
As a best practice, organizations should regard the 10%-facts-and-circumstances test as a fallback position and shouldn’t rely on using it to maintain their charity status from year to year. Instead, it’s important for entities that use the 10%-facts-and-circumstances test to take the appropriate steps to get their public support above the 33 1/3% threshold in future years.
We’re Here to Help
If you’d like to learn more about how your not-for-profit can meet its Schedule A support test, contact your Moss Adams professional.