501(c)(3) Public Charities: Examples of Donations That Satisfy the Public Support Test

Fundraising is a key component of any nonprofit Organization. In two prior blog posts I discussed how an Organization can meet the public support financial requirement and what qualifies as support, and both of those post provide important context for this post. Below I assume that the Organization would like to acquire real estate valued at approximately $100,000, but the Organization needs to raise this sum by donations. How should it raise these funds so that it can still qualify as a publicly supported organization?

1. Satisfy One-Third Support Test or Facts and Circumstances Test. The Organization must take steps to ensure it will satisfy either the One-Third Support Test or the Facts and Circumstances Test on an aggregate basis for the current tax year and the four preceding tax years, regardless of the form of acquiring the real estate. Generally, donations to the Organization should come from a large number and variety of donors so that individual donations fall within the 2% of support limit. Because the IRS applies the public support criteria on an aggregate basis, the Organization could fail to satisfy the criteria in the current tax year but achieve it when including the prior four tax years. Large donations from one or more donors do not necessarily result in the Organization losing its classification as a publicly supported organization if the donation qualifies as an unusual grant. A donation from a single donor that does not qualify as an unusual grant must be included in the denominator of the public support calculation. Part or all of the donation can be included in the numerator as Qualifying Support, to the extent the donation does not exceed 2% of the Organization’s total support.
2. Examples. The following examples assume donations in the prior four tax years were negligible and provide three different ways the Organization could acquire the $100,000 real property and still satisfy the One-Third Support Test or the Facts and Circumstances Test.

• One board member purchases and donates the $100,000 property to the Organization or directly donates $100,000 to the Organization to facilitate the property acquisition. Under the Facts and Circumstances Test, the Organization could count $2,222 of that board member’s donation as Qualifying Support and must receive an additional $8,898 of Qualifying Support to satisfy the 10% of support requirement (Total Support = $111,120). The Organization must also satisfy the remaining criteria in the Facts and Circumstances Test. Alternatively, the Organization could satisfy the One-Third of Support Test by receiving $47,000 from qualified sources and may count $3,000 of the board member’s donation as Qualifying Support (Total Support = $150,000). If the Organization satisfies the One-Third of Support Test, it need not satisfy the Facts and Circumstances Test.

• Four individuals affiliated with the Organization (including board members or their family members) each contribute $25,000 to the Organization to facilitate its purchase of the $100,000 property. Under the Facts and Circumstances Test, the Organization could count $2,222 from each donor as Qualifying Support and must receive an additional $2,230 of Qualifying Support to satisfy the 10% of support requirement (Total Support = $111,120). The Organization must also satisfy the remaining criteria in the Facts and Circumstances Test. Alternatively, the Organization could satisfy the One-Third of Support Test by receiving $35,000 from qualified sources and may count $2,500 of each $25,000 donors’ donation as Qualifying Support (Total Support = $135,000). If the Organization satisfies the One-Third of Support Test, it need not satisfy the Facts and Circumstances Test.

• Fifty individuals each donate $2,000 to the Organization to facilitate its purchase of the $100,000 property. Each of the donations is considered Qualifying Support because they are within the 2% limit of total support. The Organization satisfies the One-Third of Support Test and need not satisfy the Facts and Circumstances Test.3. Obtain Direct Donation(s) Qualified as Unusual Grant(s). Unusual grants are attractive to small charitable organizations because large donations would otherwise cause the Organization to fail the public support test. Any contribution by any entity or individual that qualifies as an unusual grant would be excluded from the numerator and the denominator in the public support calculation. This could take the form of one donation of $100,000 or several smaller donations from different donors totaling $100,000. The Organization should ensure that each contributor is not a person who is related to the Organization or to its directors and that the contributor does not later obtain a position of authority over the Organization. The Organization must otherwise meet the support requirement in that year without the benefit of the unusual grant.

The Organization should frequently refer to the IRS’ public support guidelines and consult with a qualified attorney and qualified tax advisors, especially where the Organization seeks to attract large donations (in comparison to the Organization’s annual budget).

These materials have been prepared by Rudman Winchell for educational purposes only.  They should not be considered legal advice. The transmission of this information to you is not intended to create a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel.  You should not send any confidential or private information to Rudman Winchell until a formal attorney-client relationship has been established, in writing.