Public Support Test: Schedule A

By Teal Strammer, CPA MANAGER | SARASOTA, FL

Ashlynn Reeder, CPA, MST SENIOR MANAGER | NAPLES, FL

To be considered a “public charity,” organizations exempt from tax under Internal Revenue Code (IRC) section 501(c)(3) that file Form 990 (Return of Organization Exempt From Income Tax) or Form 990EZ (Short Form Return of Organization Exempt from Income Tax) are required to complete Schedule A, the Public Support Test. Organizations that are 501(c)(3) organizations but are private foundations and file Form 990-PF, return of Private Foundation, are not subject to the additional Schedule A reporting. Schedule A is used to indicate the reason for public charity status and to provide detailed information about an organization’s public support by means of a “public support test.”

Passing the public support test on Schedule A allows publicly supported organizations to continue to operate as public charities, which qualifies them for certain preferential treatments under the law. For instance, organizations with public charity status are not subject to private foundation excise taxes. Donors to public charities benefit from a higher AGI limitation on their charitable contribution deduction, with certain cash contributions subject to a limitation of 100 percent of AGI (that is, no limitation), while donations to private foundations are subject to a 30 percent of AGI limitation. This makes public charities more appealing to potential donors. As well, public charities may engage in limited lobbying activities, while private foundations are not allowed to engage in any lobbying.

So how is the public support test applied? The accounting method used when completing Schedule A must be the same accounting method used when completing Form 990 or Form 990-EZ. Other accounting considerations when completing Schedule A include collectability of pledges, change in an accounting method, and change in a tax year.

When completing the public support test, the following main sources of income are considered:

• Gifts, grants, contributions, or membership fees if they provide support for the organization

• Gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities in any activity that is not an unrelated trade or business

• Net income from unrelated business activities

• Gross investment income (excluding capital gains)

• Tax revenues levied for the benefit of the organization and either paid to or expended on behalf of the organization

• Value of services or facilities furnished by a governmental unit to an organization without charge

Unusual grants should not be included as a main source of income. These types of grants are unusual or unexpected with respect to the amount, and by reason of size, can adversely affect the public support test. Organizations should keep accurate and complete records of all unusual grants they receive. However, forgiven Paycheck Protection Program loans are eligible to be included as income for the public support test.

Part I

All organizations subject to Schedule A reporting must complete Part I of Schedule A. Entities described on lines 1, 2, 3, 4, 6, 9, and 11 of the Schedule, that is, public institutions, only need to complete Part I. Examples of public institutions include:

• Churches

• Schools

• Hospitals and medical research organizations

• Governmental units

• Public safety organizations

• Certain agricultural research organizations

Entities described on lines 5, 7, and 8 of Schedule A are publicly supported organizations and subject to the public support test on Part II. If they fail the test, they are subject to the test on Part III. These types of organizations include:

• Organizations operated for the benefit of a college or university owned or operated by a government unit

• Organizations that receive substantial funds from a government unit or from the general public

• Community trusts described in §170(b)(1)(A)(vi)

Entities described on line 10 are operating public charities and are subject to the public support test on Part III. These organizations receive more than one-third of their support from public contributions and exempt functions and less than one-third of their support from investment and net unrelated business income. Entities described on line 12 are supporting organizations that are involved financially with entities described on lines 1 and 2 or are supported or controlled by certain organizations that are described on line 10. There are several types of supporting organizations, all of which have different filing requirements in Parts IV & V of Schedule A and may need to disclose additional information.

Part II

Organizations completing this public support test must have one-third or more of their support from governmental agencies, the general public, or other public charities. They should track contributions from excess contributors or disqualified persons so they can be removed for purposes of the test. Excess contributors are individual donors or other disqualified persons who give in excess of 2 percent of the organization’s total support. Disqualified persons are donors (and related persons) who donate in excess of 2 percent of the total support. There is a five-year look-back period for the excess contributor calculation.

Organizations that receive more than 10 percent but less than a third of their overall support from the public for two years must complete the “facts and circumstances test” to explain why it is not meeting the 33.3 percent requirement of public support but is attempting to do so. If an organization has less than 10 percent of public support and is not eligible to complete the facts and circumstances test, the organization should attempt to pass Part III of Schedule A.

Part III

Under the Part III test, just as in Part II, organizations must remove contributions from disqualified persons. However, under this test the organization must remove contributions from donors who have given more than 2 percent of total contributions in any year since inception. Once a donor has become a substantial contributor, they will remain a substantial contributor for this test. Spouses who separately give to the organization are considered as one contributor in determining their status as disqualified. Donations from other public charities in excess of 2 percent are not excluded. Additionally, organizations must remove excess revenues from customers that exceed $5,000 or 1 percent of the total support reported. This is an annual calculation that must be considered. If an organization fails the Part III test in a given year but passed the test in the previous year, they automatically pass the public support test for the current year. If the organization fails the Part III test for two consecutive years, it can attempt to pass the Part II test. If the organization does not correct their public support percentage after failing the Part III test in an initial year and cannot pass the Part II test, it must file form 990-PF, Return of Private Foundation.

Proper completion of Schedule A is imperative for a public charity. Donors and others can review an organization’s public support, and the organization can use it to demonstrate that it is receiving the support necessary to carry out its mission. As well, the IRS reviews the public support test to ensure that the organization is operating within the definition of a public charity.

Please reach out to the Nonprofit Solutions Group for information on how HBK can help you comply with these requirements.