Q&A #146 – Is IRS approval required to become a supporting organization?
Question: I lead a 501(c)(3) organization that is exploring restructuring to become a subsidiary of another publicly supported 501(c)(3) organization. In the past we have used the section 170(b)(1)(A)(vi) test in Form 990, Schedule A to maintain public charity status, but we are considering becoming a “supporting organization” of this other organization. Is IRS approval required to make this change?
Answer: According to the IRS instructions for Schedule A of the Form 990, an organization that previously used the public support tests under sections 170(b)(1)(A)(vi) or 509(a)(2) of the Internal Revenue Code is not required to receive an IRS determination that it qualifies as a “supporting organization” under section 509(a)(3) before treating itself as supporting organization in Schedule A. However, some organizations may wish to request such an IRS determination using Form 8940.
“Supporting organization” status is a tax classification that enables qualifying 501(c)(3) organizations to avoid “private foundation” treatment without having to satisfy the complex “public support” tests under sections 170(b)(1)(A)(vi) or 509(a)(2) of the Internal Revenue Code.
Qualification as a supporting organization is a complex topic, but the basic idea is that a supporting organization is not required to satisfy the public support tests by itself since it is closely connected to another organization that satisfies these tests. Many 501(c)(3) organizations that are subsidiaries of other organizations already satisfy the requirements to qualify as a supporting organization, or can qualify with minor adjustments to their governing documents, mission, and programs.
While the requirements to qualify as a supporting organization are complex, the process of reporting this change in status on the Form 990, Schedule A is relatively straightforward. As explained in Example 3 in the IRS instructions for Schedule A, an organization that previously used the public support test under section 509(a)(2), or, presumably, section 170(b)(1)(A)(vi), can treat itself as a supporting organization simply by checking the appropriate box and filling out the applicable parts in the Schedule A. This flexible process is similar the one that applies to organizations that wish to switch between the section 170(b)(1)(A)(vi) and section 509(a)(2) tests.
Of course, an organization must ensure that it satisfies the requirements of supporting organization status before electing this treatment. Seeking advice from an attorney and CPA who is experienced in this area is highly recommended.
Planning Tip – Before making a change to your organization’s public charity classification, reach out to your organization’s grantors early in the process to let them know about these plans, particularly those that regularly make grants to your organization or have recently made grants that are still within the period for use and reporting. Some grantors require an opinion letter from an attorney or some other form of recent verification of public charity status, particularly if the grantee is a “supporting organization.” The requirements of your grantors may impact the approach and expected cost of the change, so it is important to get this information sooner rather than later.
Additionally, be aware that a change to the organization’s public charity classification will not be reflected in the IRS records (accessible via irs.gov/teos) unless the IRS has issued a determination letter approving the change. This may cause confusion among your organization’s grantors and/or donors. For this reason, the organization may wish to seek official approval of supporting organization status by submitting a Form 8940 (Request for Miscellaneous Determination) to the IRS, although this process is not required and organizations should weigh the time, costs, and benefits of doing so before proceeding.
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