Has COVID-19 hurt your public support test percentage? – Charitable and non-profit organizations
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Nonprofits that qualify as public charities are required to pass a public support test each year to maintain their tax-exempt status. For many organizations, this test has been more of a formality than an obstacle. However, with the COVID-19 pandemic, which began in March 2020, many nonprofits have had to cancel or change the format of their major fundraisers. As a result, organizations have seen a shift in their donor base, which could negatively impact the public support test.
What is the public support test?
The purpose of the public support test is to ensure that public charities are funded by a variety of donors rather than just a few. The calculation required to pass the public support test is shown in Appendix A of Form 990. Public support income divided by total support income must be at least 33 1/3% based on a 5-year moving average. Public support includes contributions from public or government units as well as contributions from other sources, as long as a single donor’s cumulative donations do not exceed 2% of an organization’s total support over the past five years.
For example, NFP A has received total support of $100,000 for the past 5 years. Donor B contributed $10,000 over the 5-year period. $2,000 of Donor B’s contributions count for the public support test while the remaining $8,000 is considered excess contribution and not considered public support. Although nothing prevents donors from contributing more, it is important to recognize that these donations will be included in the total support, and not in the public support, which will reduce your percentage.
Impact of COVID-19
Now that you know how the test works, let’s take a look at how the past two years may have impacted a nonprofit’s ability to pass the public support test.
Many nonprofits rely on in-person fundraisers for support. These events usually attract significant public support and often a large number of donors. As these events have been canceled or modified in response to COVID-19, some organizations have seen a drop in donor numbers and dollars.
This has been particularly problematic for organizations that have been formed in recent years. It is very common to see a concentration of donors when an organization is first established. Fortunately, an organization does not have to pass the public support test for the first five years of its existence. By year six, many organizations have built a diverse donor base and can easily pass the 33 1/3% requirement. Unfortunately, due to COVID-19, some organizations have lost two years cultivating their donor base.
Organizations should review their public support calculation to ensure there are no surprises. Because the calculation is done on a rolling 5-year basis, it is possible for an organization to be good one year, but may not be able to make it the next. Fortunately, the IRS provides an exception for these situations. Organizations do not need to pass every year, but must pass either the current year or the previous year. Organizations that are unsuccessful for two consecutive years risk losing their public charitable status and will instead have to operate as a private foundation in the future. Private foundations are subject to a variety of strict rules that most organizations will want to avoid.
This calculation can be tricky and involves many rules. If you have any concerns about your organization’s ability to pass the public support test, please contact your ORBA CPA.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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