This article is going to explore the public support test on Schedule A of a Nonprofit organization’s 990. Nonprofit organizations must be organized and operated exclusively for exempt purposes and none of its earnings may inure to any private shareholder or individual. In a nonprofit organization’s initial application for tax exempt status to the IRS they are required to select a reason why they are a public charity. Schedule A is used by an organization to provide the required information about public charity status and public support in accordance with the exempt status of the organization. There are 12 types of exempt entities which are detailed on Schedule A. Some of the types of exempt entities are not required to meet the public support test.
The reason for public charity status dictates which portion of schedule A an organization is required to complete. This article will not explore all of the items reported on Schedule A but it will cover the following topics:
- Public Support
- Disqualified contributions
- Total Support
- Computation of Public Support Percentage
- Computation of Investment Income Percentage
Organizations that selected number 5, 7, or 8 as their reason for public charity status must meet the following public support test:
- 33 1/3% or more of its total support must come from governmental units, contributions from the general public, and contributions or grants from other public charities;
- OR 10% or more of its total support must come from governmental units, contributions from the general public, and contributions or grants from other public charities and the facts and circumstances indicate it is a publicly supported organization.
Organizations that selected number 10 as their reason for public charity status must meet the following public support test:
- More than 33 1/3% of its support normally must come from gifts, grants, contributions, membership fees, and gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities in an activity which isn’t an unrelated trade or business under section 513;
- AND No more than 33 1/3% of its support normally must come from gross investment income and net unrelated business income (less section 511 tax) from businesses acquired by the organization after June 30, 1975.
Public Support
Section A in Part II and III of schedule A begins by reporting total public support. This should include all gifts, grants, contributions, and the contribution portion of membership fees received. Additionally, public support includes amounts received from a governmental entity if the purpose of the payment is to provide a direct benefit to the public. Contributions meeting the definition of unusual grants would be excluded from public support. Public Support would be reduced by any disqualified contributions which are described below.
Disqualified contributions
For Organization of type 5, 7, or 8 contributions by each individual, trust, or corporation included in the public support section for the 5 years reported that exceeds 2% of the total support amount is deducted from the total public support for the public support percentage test. Any government contributions are not included in this disqualified contributions calculation
For Organizations of type 10 contributions from disqualified persons (as defined in IRS standards) and any gross receipts included in the public support revenue from related activities received from a person or from a bureau or similar agency of a governmental unit that exceed the greater of $5,000 or 1% of the total support is deducted from the total public support for the public support percentage test.
Total Support
Section B in Part II and III of schedule A reports the remaining support revenue of an Organization. This section would include the gross income from interest, dividends, rents, royalties and income from similar sources. It would also include unrelated business income, any miscellaneous income (excluding sale of capital assets) and gross receipts from related activities.
The gross receipts line should include gross receipts from admissions, sales of merchandise, performance of services, furnishing facilities, the exchange portion of membership fees, support from a governmental unit that is used to serve the direct and immediate needs of the payor (an example of this would include Medicare and Medicaid payments). This type of income is excluded from total support for Organizations of type 5, 7, or 8 and is included in public support revenue for Organizations of type 10.
Computation of Public Support Percentage
The public support percentage is determined by taking the total public support for the 5 year period reported and dividing by the total support for the 5 year period reported.
Public support is measured using a 5-year computation period. If an Organization doesn’t meet the public support requirements in a single year that doesn’t mean they will lose their nonprofit status, the public support test just needs to be met over the 5-year period. An organization in its first 5 years of existence is not required to meet the public support requirements until year 6. New organizations should carefully monitor its public support to ensure it will meet a public support test by it’s 6th and succeeding years.
For Organizations of type 5, 7, or 8 if the public support test is not appropriately met but the percentage is greater than 10%, the Organization can determine whether or not they meet the facts and circumstances test which includes describing the following:
- Whether the organization maintains a continuous bona fide program for solicitation of funds from the general public, community, membership group involved, governmental units, or other public charities.
- List all other facts and circumstances, including the sources of support, whether the organization has a governing body that represents the broad interests of the public, and whether the organization generally provides facilities or services directly for the benefit of the general public on a continuing basis.
- If the organization is a membership organization, explain whether the solicitation for dues-paying members is designed to enroll a substantial number of persons from the community, whether dues for individual members have been fixed at rates designed to make membership available to a broad cross section of the interested public, and whether the activities of the organization will likely appeal to persons having some broad common interest or purpose.
For Organization of type 10, if the public support test is not met the investment income percentage is reviewed.
Computation of Investment Income Percentage
The investment income percentage is determined by taking the total investment income for the 5 year period reported and dividing by the total support for the 5 year period reported. If this amount is above 33 1/3% and the public support percentage is below 33 1/3% the Organization will no longer qualify as a public supported organization, and it will now be classified as a private foundation.
Schedule A is a complex schedule with many different reporting requirements. Emphasis must be placed on reporting an organization’s public support and total support to ensure compliance with nonprofit organization requirements. If you have any questions regarding the public support test, please contact your Hawkins Ash CPAs representative. You can find a copy of Schedule A here: IRS Schedule A.
