Forms 990 and 990-EZ: Couldn’t we all use some support?

October 9, 2019

While we all want to feel supported and provided for, the issue of “support” is an important one for public charities. Public charities are organizations conducting the charitable activities described in Internal Revenue Code section 501(c)(3). Charitable organizations that do not meet the IRS’s specific criteria for public charities are classified as private foundations. In fact, a newly formed §501(c)(3) organization is initially classified as a private foundation until they can prove that they meet the qualifications of a public charity. Usually, an organization would rather be a public charity than a private foundation for the following reasons:

    a) Tax-deductible giving limits are more beneficial for public charities.

    b) It is “easier” for public charities to receive support from certain types of public charities, including governmental entities and private foundations.

    c) Public charities have shorter, less-complex options for the annual Form 990 information return, whereas all private foundations, regardless of size, must file the lengthy and complex Form 990-PF.

    d) Public charities are not subject to the net investment income excise tax, minimum distribution requirements, and other restrictive regulations (e.g. self-dealing / taxable expenditures) that private foundations must follow.

Any public charity that files a Form 990 or Form 990-EZ must complete Schedule A to prove annually that it satisfies the requirements to continue as a public charity.

As part of completing Schedule A, the public charity indicates (on Part I) why it is not a private foundation, and then, depending on the reason it is not a private foundation, it either:

    a) Does not need to complete any further Parts of Schedule A because it qualifies as a public charity by nature of its tax-exempt activities (generally, churches, schools, and hospitals) OR

    b) Must complete either Part II or Part III of Schedule A (commonly referred to as “support tests”) OR

    c) Must complete Part IV because it is a supporting organization (as defined by the IRS); certain Types of supporting organizations must also complete Part V.

Public charities should:

    a) Annually review their public charity classification and public support calculation on their Schedule A.

    b) Understand the Schedule A Part II and Part III support test preparation challenges that arise due to the nature of the information required and the intricate definitions involved (it is too important a matter to leave simply to the Form 990 preparers).

    c) Consider what future contributions or other revenue would be required for the organization to continue to maintain its public charity status.

The Instructions to Schedule A and several postings on the IRS website provide valuable information. In addition, AICPA Not-for-Profit Section members can view the resource, “Navigating the Challenges of Schedule A, Public Support Test” for additional help.