Understanding Schedule A Public Support Tests
Transcript of 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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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
REASON FOR PUBLIC CHARITY STATUS
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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REASON FOR PUBLIC CHARITY STATUS
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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)
Public Charity Status
› 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
Public Charity Status
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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
Public Charity Status
› 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
Public Charity Status
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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
Public Charity Status
› 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
Public Charity Status
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Public Charity Status
› 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
Public Charity Status
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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
Public Charity Status
Generally, these organizations test consumer products to determine their acceptability for use by the general public
Public Charity Status
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Much more on this later
Public Charity Status
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
PART IISupport Schedule for Organizations Described in Sections 170(b)(1)(A)(iv) & 170(b)(1)(A)(vi)
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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PART IISupport Schedule for Organizations Described in Sections 170(b)(1)(A)(iv) & 170(b)(1)(A)(vi)
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]
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 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]
PART IISupport Schedule for Organizations Described in Sections 170(b)(1)(A)(iv) & 170(b)(1)(A)(vi)
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)
Revenue amountsCorresponding line items
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]
PART IIISupport Schedule for Organizations Described in Sections 509(a)(2)
Revenue amountsCorresponding line items
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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PART IIISupport Schedule for Organizations Described in Sections 509(a)(2)
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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All 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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