Will the public change the way it makes donations as a result of the Job Cuts and Jobs Act? And will your non-profit be impacted by those behavioral changes?
These questions are being asked by non-profit leaders across the country. There is a fear that a decrease in charitable giving will cause operating shortfalls and jeopardize your public charity status. One way to maximize your organization’s public support, no matter how charitable giving changes, is to make sure you are not in jeopardy of losing your charitable status. You do this by correctly filling out the new Schedule A (Form 990) to maximize your organization’s public support.
Calculate Your Public Support Percentage
Make sure you use Schedule A, which is submitted with your Form 990, to properly calculate your public support. Part 1 of this form looks at the reason for your public charity status. As a 501(c)3, you will likely select either option 7, which says your support comes from the general public, or line 10 to claim that one-third of your support comes from contributions, membership fees and gross receipts related to your mission.
Both options require you to complete a different part of the form to calculate your public support percentage. If you chose line 7, you must complete the Part II support schedule and, if you chose line 10, you must complete the Part III support schedule. You are encouraged to use the method that will allow you to meet the public charity requirements.
Pay Attention to Excess Contributions
The key to maximizing deductions in Part II comes down to Line 5. This calculation requires contributions that exceed 2 percent of total support (per Section B of Schedule A Part II and not the total revenue per the core form 990) be subtracted before determining total public support. The only exceptions are governmental units or public charities.
If your organization receives a contribution from another public charity, you do not need to include it in the Line 5 subtraction.
Determining Disqualified Persons and Significant Contributors
If your organization has significant revenue from admissions, or the sale of merchandise and/or services, Part III might be more beneficial to you. In this calculation, line 7matters most.
Part III is the only section that lets you report these revenue streams. This section also allows you to remove support from a disqualified person and subtract out larger contributions. Here’s how that works:
- Line 7a allows you to remove support from a disqualified person. This is someone who is a significant contributor, an officer, director trustee or equivalent, someone with more than 20 percent of the voting power and some family members. The description for significant contributor is more complex, but it’s generally those individuals (including spouses) who gave more than $5,000 if that amount is more than 2 percent of total contributions from inception through the current reporting yearend.
Where the concern lies is in the fact that once a donor is considered a substantial contributor, they are typically always considered one. So if you have a large donor in the first year of inception, their donations would always be subtracted from public support under this calculation.
- Line 7b subtracts contributions above $5,000 or 1 percent of total support (per Section B of Schedule A Part III and not the total revenue per the core Form 990). When you are identifying these excess contributions, especially if you are still in the early stages of formation, you need to proceed carefully since all support for substantial contributors will be removed from this calculation on a go forward basis.
Don’t Miss Donated Services or Facilities
An often missed income contribution includes the value of those services or facilities furnished to you without charge. These are not reported in the core part of the Form 990, but you can add back in the value of these donations in both Parts II (line 3) and Parts III (line 5).
Use the Method that Works Best
The public support tests in both Parts II and III use different information to calculate public support. They both have their advantages and the best option to use depends on the revenue stream of the organization.
There are many complex rules surrounding Schedule A and a lot more to cover than what is included here. Contact us, or your personal tax adviser, to make sure your organization is receiving the most advantageous calculation based on all available information.