Our new nonprofit is in the final year of the five-year period to confirm our status as a public charity and avoid classification as a private foundation. Currently, we are at 22%. While we feel confident we can meet the “facts and circumstances” test possible for those with more than 10% public support, we prefer to obtain status automatically via the 33 1/3% threshold and not have to rely on the discretion of the IRS. We were incorporated in late 2022 and didn't receive any contributions until August 2023. Is there a possibility the IRS would grant us another year to obtain public status via the one-third rule? —From the Website.
It is very unlikely that the IRS will formally grant you another year to meet the requirement of one-third public support to assure your public charity classification that automatically qualifies an organization as publicly supported under Section 509(a)(1) of the Tax Code. If your public support for the five years ending with your next filing exceeds at least 10%, as you expect it will, you should make your best “facts and circumstances” argument on Schedule A to the Form 990 when you file. You can stress your late start in fundraising, the broad base of small donors you presently have, hopefully the increase in numbers of small donors in the most recent years, and the efforts you are making to expand your donor base. Assuming that someone actually reads your response, the IRS is not likely to be too harsh.
But you should do everything you can to increase the percentage of public support between now and the end of your fiscal year. The closer you get to one-third, the more likely you are to pass the test if you are still less than one-third. That probably means finding more donors to contribute. As long as they contribute less than 2% of your total support for the five years, their entire contribution will go in the numerator of the fraction. Their total contribution will be included in the denominator, but if they have contributed more than 2%, only the 2% will be included in the numerator. If you can get a grant from a governmental entity or from another public charity, like the United Way, or a community foundation, those gifts will be included fully in the numerator of the fraction. (See Ready Reference Page: “Calculating Public Support” for a detailed description of the calculation.)
You don’t say how much money you have taken in or how much is excluded from the numerator because it comes from a single person (you?) or a small group of founders. If you are able to get additional contributions from these people, try to get them to give through a donor advised fund, perhaps including an advanced gift for next year. If they don’t have a DAF, urge them to open one. It’s easy to do.
Gifts from a DAF are considered gifts from the public charity that sponsors the DAF and are therefore included in the numerator of the fraction in full, without regard to the 2% limit on gifts from individuals, corporations or private foundations. Congress or the IRS is likely to change that rule some time in the future to attribute the gift to the donor advisor rather than the DAF sponsor, but they haven’t done it yet. Many organizations are classified as publicly supported only because their founders funnel their contributions through their DAFs and convert their personal gifts to public support for purposes of the calculation. You should see if you can make that rule work for you.
Add new comment