Q&A #72 – What is required to meet the 10% facts and circumstances public support test?
Question: My 501(c)(3) nonprofit organization’s public support percentage dropped below the required 33 1/3% for our most recent fiscal year. What is required to qualify to use the 10% facts and circumstances test in Form 990, Schedule A?
Answer: It is common for 501(c)(3) public charities to rely on the 10% facts and circumstances test as an alternative to maintaining 33 1/3% public support that is generally required under Internal Revenue Code sections 509(a)(1) and 170(b)(1)(A)(vi). However, there are certain requirements that must be satisfied, and the Form 990, Schedule A requires organizations to explain how they meet these requirements.
There are two threshold requirements that must be satisfied as a starting point:
The organization must have at least 10% public support, calculated in the same manner in which public support is calculated under the 33 1/3% test; and
The organization must maintain a “continuous and bona fide program” for the solicitation of funds from the general public, its membership, governmental entities, or other public charities.
Note that 10% public support requirement is a minimum. The higher the percentage of the organization’s public support above this 10% minimum, the more favorable the organization will be viewed under the facts and circumstances test.
With regard to the solicitation of funds, an organization that can demonstrate that it actively engages in fundraising from the public and has, in fact, received smaller donations and grants consistently in the past, will be viewed more favorably under the facts and circumstances test.
Assuming these two threshold requirements have been satisfied, the rest of the test hinges on an analysis of “all pertinent facts and circumstances,” with particular emphasis on the composition of the organization’s Board of Directors and the nature of its services.
An organization will be viewed more favorably when the organization can demonstrate that it “has a governing body which represents the broad interests of the public, rather than the personal or private interests of a limited number of donors [or their family members or related business entities].” Treas. Reg. § 1.170A–9(f)(3)(iii)(C). In other words, a well-qualified Board with diverse backgrounds, skill sets, and perspectives will be better positioned to satisfy the test than a Board comprising only the founder’s friends and family.
Lastly, an organization that “provides facilities or services directly for the benefit of the general public on a continuing basis” (for example, providing aid to disadvantaged communities or operating a museum or library that is open to the public) will be viewed more favorably under the test.
Planning Tip – As with many tax issues, contemporaneous documentation is key. If your organization may need to rely on the 10% facts and circumstances test, make sure that the organization maintains Board meeting materials, strategic planning documents, budgets, financial reports, and other documents that demonstrate its efforts to: (1) raise funds from the public; (2) recruit a diverse set of skilled Board members; and (3) and maintain programs that directly benefit the public.
Do not be discouraged if your organization does not appear to be in position to clearly satisfy all of the factors described above. The test is inherently subjective, and the weight given to any one factor will vary depending on your organization’s specific circumstances. The goal is to describe your organization’s actual circumstances in the best possible light when drafting the Form 990, Schedule A.
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