understanding schedule a public support tests

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Understanding Schedule A Public Support TestsNovember 21, 2019

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INTRODUCTIONS

Kevin EnsmingerDirector, [email protected]

Shawnell LinotManager, [email protected]

REASON FOR PUBLIC CHARITY STATUS

1 Church, convention of churches or association of churches

School

Hospital or cooperative hospital service organization

Medical research organization operated in conjunction with a hospital

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5

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8

Organization operated for the benefit of a college or university owned or operated by a governmental unit

Federal, state or local government or governmental unit

Organization that normally receives a substantial part of its support from a governmental unit or from the general public

Community trust


9 Agricultural research organization

Organization that normally receives more than 33 1/3% of its support from contributions

Organization organized & operated exclusively to test for public safety

Organization organized & operated exclusively for the benefit of one or more publicly supported organizations

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Schedule A, Part 1Reason for Public Charity Status

› IRS is hesitant to issue regulations on whether an organization qualifies as a church because of freedom of religion issues

› Previously used 14 criteria to determine if a specific organization is a church (not all must be met)

› Typically not required to file Form 990

Public Charity Status

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› An education organization which normally maintains a regular faculty & curriculum & normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on

• Online-only programs able to qualify for exempt status?› Required to maintain a nondiscriminatory policy, including a church school whose determination is based on

sincerely held religious beliefs• However, a school does not violate this policy when it selects students on the basis of membership in a particular

religious denomination, provided the denomination is open to everyone on a racially nondiscriminatory basis› Charter schools are considered public rather than private schools, & therefore, are not required to complete

Schedule E (use Schedule O to explain)


› An entity can qualify as a hospital when its principal purpose is to provide medical education & medical research

• However, such an entity must also be actively engaged in providing medical or hospital care as an integral part of satisfying its principal purpose

› A hospital cannot be a 501(c)(3) organization unless the hospital meets 501(r) requirements• If multiple hospital facilities, the noncompliant facilities will be subject to tax

› For Schedule H, a hospital or hospital facility is required to be licensed, registered or similarly recognized by a state as a hospital

• Different from Schedule A’s definition – only required to file Schedule H if it meets the Schedule H definition of hospital facility


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› Principal purpose or function is to engage in medical research• Includes the conduct of investigations, experiments & studies to discover, develop or verify

knowledge of causes, diagnosis, treatment, prevention or control of physical or mental diseases & impairments of man

› Research must be conducted to serve a public rather than private interest


› Must pass public support test in Part II

› Organized & operated exclusively to hold, invest & administer property & to make expenditures to or for the benefit of a college or university (described in line 2) or an instrumentality of one or more states or political subdivisions


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› A state or possession of the United States (or any political subdivision of these), the United States, or District of Columbia

› Typically not required to file Form 990


› Must complete Part II (much more on this later)

› Substantial portion of their revenues & operations come from charitable contributions made to the organization & other public support

› Very common exemption designation


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› Must complete Part II› Established to attract large endowment contributions for the benefit of a particular community› Such contributions are often received & maintained in separate trusts or funds subject to varying degrees of control by

the community trust’s governing body› To be treated as part of a community trust rather than a separate trust or not-for-profit corporation, a trust or fund (1)

must be created by a transfer to a community trust that is treated as a single entity & (2) may not be directly or indirectlysubjected by the transferor to any material restriction on the transferred assets

› Directly engages in the continuous active conduct of agricultural research (as defined in the National Agricultural Research, Extension, and Teaching Policy Act of 1977)

› During the calendar year in which the contribution is made such organization is committed to spend such contribution for such research before January 1 of the fifth calendar year, which begins after the date such contribution is made


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› Must complete Part III (much more on this later)

› More than 1/3 from qualifying support; 1/3 or less from gross investment income & UBI

› Disqualified persons & excess support limitations reduce public support

› Special investment income attribution rule


Generally, these organizations test consumer products to determine their acceptability for use by the general public


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Much more on this later


Schedule A, Part IISupport Schedule

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SCHEDULE A, PART II, SECTION A[509 (a)(1) Public Support Calculation]

› Normally receives a substantial part of support from a governmental unit or from contributions from the general public

› Public support/total support = public support % > 33.33%› “Good” money: contributions from other 509(a)(1) entities

• Anyone else that has given less than 2% of total contributions plus interest, dividends, rents over the last five years

› “Bad money: substantial contributors (more than 2% of total contributions)• Does not consider fees for service revenue

SCHEDULE A, PART II, SECTION A[Public Support: Numerator]

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PART IISupport Schedule for Organizations Described in Sections 170(b)(1)(A)(iv) & 170(b)(1)(A)(vi)

Revenue amountsCorresponding line items

Schedule A, Part II Form 990, Part VIII Statement of Revenue

Line 1 – gifts, grants, contributions & membership fees received

Line 1h less unusual grants or tax levies

Line 2 – tax revenues levied Tax levies included on line 1h

Line 3 – value of services/facilities furnished by a govt. unit w/out charge

N/A

Line 5 – excess contributions Use line 1h in calculation


Unusual grants› Generally are substantial contributions

& bequests from disinterested persons & are

• Attracted because of the organization’s publicly supported nature

• Unusual & unexpected because of the amount

• Large enough to endanger the organization’s status as normally meeting the 33 1/3% public support test (or 10% facts & circumstances test)

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SCHEDULE A, PART II, SECTION A, LINE 5[Excess Contributions Calculation]

› Removes excess portion of contributions from each donor more than 2% of total revenue reported on the schedule

• Lowers numerator of calculation• Proves contributions are from a broad base of donors• Excess calculation does not include contributions from the following

› Publicly supported organizations

› Governmental units

SCHEDULE A, PART II, SECTION A, LINE 5[Excess Contributions Calculation Example 1]

Total revenue (Schedule A, Part II, line 11f) during the five-year period is $20MColton Collins has given $8M during the same five-year period

2% of $20M is $400KTherefore, $7.6M ($8M − $400K) must be excluded on line 5 as excess contributions

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Definition of support; meaning of general publicAll contributions made by a donor & by any person(s) with a relationship to the donor (§4946(a)(1)(C)) shall be treated as made by one personFor example1. Individual gives $100K & their trust gives

$100K, must add this together for excess contribution calculation

2. Individual gives $100K & a corporation more than 35% owned by individual gives $200K, must be added together

SCHEDULE A, PART II, SECTION A, LINE 5[Excess Contributions Calculation Example 2]

Total revenue (Schedule A, Part II, line 11f) during the five-year period is $20MDuring the same five-year period, Regan Roberts gives $5M & his 60% owned corporation, Roberts Roth Racing, gives $5M

2% of $20M is $400KTherefore, $9.6M ($5M +$5M − $400K) must be excluded on line 5 as excess contributions

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SCHEDULE A, PART II, SECTION B[Total Support: Denominator]



Schedule A, Part II Form 990, Part VIII Statement of Revenue

Line 8 – gross income from interest, dividends, rents, royalties

Lines 3, 4, 5, & 6a

Line 9 – net income from unrelated business activities Column C

Line 10 – other income Lines 11a-dLine 12 – gross receipts from related activities

Lines 2, 8a, 9a, & 10a

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SCHEDULE A, PART II, SECTION C[Public Support Percentage: Public Support/Total Support]


10% facts & circumstances test[Schedule A, Part II, Line 17a & b]

› Explain in Part IV how the organization meets the test

• Reg §1.170A-9(f)(3)• Sources of support• Governing body representing broad

interests of the public

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Schedule A, Part IIISupport Schedule

SCHEDULE A, PART III, SECTION A[509(a)(2) Public Support Calculation]

› Public support/total support = % > 33.33%› Investment income/total support = % < 33.33%› “Good” money: contributions from 509(a)(1) charities

• Customers that have not paid more than 1% of total receipts for the year

› “Bad” money: disqualified persons donations or payment for service revenue

• Customers that have paid more than 1% of total receipts

• Contributions from 509(a)(2) or 509(a)(3) charities

• Interest, dividend, rent, royalties & UBI income

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SCHEDULE A, PART III, SECTION A[Public Support: Numerator]

PART IIISupport Schedule for Organizations Described in Sections 509(a)(2)


Schedule A, Part III Form 990, Part VIII Statement of Revenue

Line 1 – gifts, grants, contributions & membership fees received

Line 1h less unusual grants or tax levies

Line 2 – program-related gross receipts Lines 2 & 10a

Line 3 – gross receipts from activities, not UBI under §513 Lines 8a & 9a

Line 4 – tax levies Tax levies included on line 1h

Line 5 – services/facilities provided by govt. w/out charge N/A

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SCHEDULE A, PART III, SECTION A, LINE 7A[Amounts Received from Disqualified Persons]

› Removes amounts in lines 1, 2, & 3 that are received by “disqualified persons”

• Substantial contributors

• Officer/director/trustee of the organization

• > 20% owner of the voting power of the entity that is a substantial contributor to the organization

• Family member of an individual in the first three categories

• Corporation, partnership, trust or estate in which persons described in the four categories above own more than 35%

SCHEDULE A, PART III, SECTION A, LINE 7B[Excess Service Revenue Calculation]

› Removes excess portion of gross receipts included on Part III, lines 2 & 3 more than $5K or 1% of total revenue, whichever is greater

• Lowers numerator of calculation

• Proves contributions are from a broad base of customers

• Excess calculation does not include contributions from disqualified persons

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SCHEDULE A, PART III, SECTION A, LINE 7B[Excess Service Revenue Example 1]

Total revenue (Schedule A, Part III, line 13) is $20MSam Shepherd gave $3M during the year

1% of $20M is $200KTherefore, $2.8M is reported on line 7b ($3M − $200K)

SCHEDULE A, PART III, SECTION A, LINE 7B[Excess Service Revenue Example 2]

Total revenue (Schedule A, Part III, line 13) is $20MMaggie McCormick paid $100K in service revenue personally & her living trust also paid $150K

1% of $20M is $200KTherefore, $50K is reported on line 7b ($100K + $150K − $200K)

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SCHEDULE A, PART III, SECTION B[Total Support: Denominator]



Schedule A, Part III Statement of RevenueLine 7a – amts. included on lines 1-3 received from DQ persons

N/A

Line 7b – amts. included on lines 2 & 3 >$5k or 1% of amt. on line 13 for year

N/A

Line 10a – gross income from interest, dividends, rents, royalties

Lines 3, 4, 5, & 6a

Line 10b – UBI 990-TLine 11 – net income from UBI not included in line 10b No coordinating line item

Line 12 – other income Lines 11a-d

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Special investment income attribution rule

› Flow-through concept

› Recharacterize contributions

› Investment income of distributing entity is deemed distributed before other types of income

SPECIAL INVESTMENT INCOME ATTRIBUTION RULE[Examples]

A foundation organized to support your not-for-profit organization contributed $100K during the year. The supporting organization had $200K of interest & dividend income that year

The entire $100K contribution would be included in line 10a, investment income

Your supporting organization contributed $100K to your NFP. They had $60K of investment income during the year

$60K would be included in line 10a & $40K included in line 1

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SCHEDULE A, PART III, SECTION C & D[Public Support & Investment Income Percentage]

Schedule A, Part IVSupporting Organizations

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› Parts IV & V – supporting organizations• Type I – operated, supervised or controlled by a beneficiary organization

› Parent-subsidiary relationship – IRS comfortable with this› Private nonoperating foundation & donor-advised fund grants are generally qualified if there is no control with disqualified person of granting

organization

• Type II – supervised or controlled in connection with a beneficiary organization› Brother-sister relationship – IRS comfortable with this› Private nonoperating foundation & donor-advised fund grants are generally qualified if there is no control with disqualified person of granting

organization

• Type III – operated in connection with one or more beneficiary organizations› Functionally integrated

• More annual requirements than a Type I or II• Private nonoperating foundation & donor-advised fund grants are generally qualified if there is no control with disqualified person of granting

organization

› Nonfunctionally integrated• Treated very similar to a private foundation• Private nonoperating foundation & donor-advised fund grants are not qualified

Note – direct IRA distributions to supporting organizations are generally not qualified for exclusion from taxpayer’s gross income

Supporting Organizations

All Supporting Organizations

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Type 1 Supporting Organizations

Type II Supporting Organizations

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All Type III Supporting Organizations

Type III Functionally Integrated Supporting Organizations

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TYPE III Nonfunctionally Integrated Supporting Organizations

TYPE III Nonfunctionally Integrated Supporting Organizations

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Supplemental Information

Questions?

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The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.

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Thank You!

understanding schedule a public support tests

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