We get a lot of questions from our not-for-profit (NFP) clients, and we thought it would be valuable to publish our answers. Reach out to us if you would like to see a question in a future newsletter.
One of our board members made a significant contribution to our 501c(3) organization. Does this put our tax-exempt status in jeopardy?
Answer: It’s Complicated
While this donation may not impact your tax-exempt status, it could affect your public charity status. Public charities are required to meet the public support test. Think of the public support test as a way to prevent wealthy individuals from funding their own private goals through a public charity. You may wonder why: money is money, right? The short answer is, it’s complicated. In having to solicit funding from the public, public charities are “forced” to appeal to public issues and concerns. This creates checks and balance on the activities and services that these organizations provide.
Public support tests
Generally, if a public charity doesn’t meet the public support tests, they are required to report as a private foundation. Donors to private foundations also receive tax deductible contribution advantages (although typically more limited than public charities); however, the private foundations must follow more robust reporting, minimum annual asset distributions, as well as disbursing funds in accordance with IRS requirements, instead of operating their own programs.
For these reasons, contributions from major donors and from those with influence over a public charity (board members, for example) are generally excluded from “public support.” To determine whether this puts your organization at risk, you would need to calculate the percentage of public support for the last five years under one of two tests: IRC 509(a)(1) or 509(a)(2).
Under 509(a)(1), public support as a percentage of total support must be at least 33 1/3%. Individual contributions exceeding 2% of total contributions are excluded from the numerator of the calculation but are included in the denominator. For organizations without a large contributing donor base, this can be an issue. Certain unusual contributions may fall into the category “unusual grants” and be excluded from the calculation. This classification helps to prevent any ill effects from certain significant and unexpected contributions.
There also may be additional relief if your NFP organization doesn’t meet the 33 1/3% requirement above, but still received more than 10% of support from the general public and you meet the facts and circumstances of a publicly supported organization. If you believe you do, you can support your case through a written narrative in the annual Form 990 filing. Factors to consider include: services provided to the general public, the breadth of the governing body, established programs to solicit contributions, among others.
Under 509(a)(2), an organization must receive more than 33% of its support from the general public and/or from gross receipts from activities related to its tax-exempt purpose. Think of this as primarily applying to hospitals, schools, museums, etc. Under this test, board members would be considered “disqualified persons” and none of these contributions would be included in the numerator (major donors also fall under this category). Another caveat under this test is that the organization cannot receive more than 33% of its support from investment income and unrelated business income.
We can help
If you are planning an upcoming NFP capital campaign or program funding, these may all be factors to consider. Navigating the IRS rules and regulations can be challenging. Contact a CSH representative today for further information or to submit a question.