Q&A #89 – Are grants from donor advised funds subject to 2% limit when calculating public support on Form 990, Schedule A?
Question: My organization receives a large portion of its funding from a single donor who donates through a donor advised fund. We are concerned about the impact this may have on the organization’s public support test, but I have heard that contributions from a donor advised fund are treated more favorably. Is this true?
Answer: As of the date of this post, contributions received from a donor advised fund (DAF) are generally counted in full and not subject to the 2% limitation when calculating public support under section 170(b)(1)(A)(vi) of the Internal Revenue Code on Form 990, Schedule A. This favorable treatment currently applies regardless of whether the individual who holds the DAF account makes substantial contributions to the organization. However, this treatment has been under increasing scrutiny, so be aware that these rules could change significantly in the future.
As explained in Q&A # 63, contributions from most grantors or donors are generally counted only to the extent that the contributions from each grantor or donor exceeds 2% of the organization’s “total support” (calculated over the most recent 5-year aggregated period). However, this 2% limitation does not apply to support received from governmental units or other 501(c)(3) publicly supported charities (i.e., organizations that are themselves described in section 170(b)(1)(A)(vi) of the Code).
DAFs are, by definition, owned and controlled by 501(c)(3) public charities. Account holders “advise” where they want their contributions to go, but the “sponsoring organization” is under no legal obligation to follow this advice (although in practice they usually do). Therefore, under current law, contributions from a DAF are not considered subject to the 2% limit. This leads to an arguably anomalous result whereby donations made directly by an individual would be subject to the 2% limit, while donations made from the same individual’s DAF account are counted in full.
Some regulators and lawmakers see this as a loophole that should be closed. In 2017, IRS issued Notice 2017-73, which announced that the Treasury Department and IRS were considering a rule that would consider contributions from a DAF to be made by the DAF account holder (among other DAF reforms). While no regulations have yet been issued to implement this change, federal legislation called the Accelerating Charitable Efforts (ACE) Act has been recently proposed that would make similar reforms.
Planning Tip – Organizations that receive a large portion of their funding from a handful of major donors who donate through a donor advised fund (DAF) should work with their tax advisors to analyze how a change in the laws regarding DAF contributions could affect their public support tests. Explore scenarios in which your major donors are treated as if they contribute individually instead of through a DAF. If these hypothetical calculations show a significant drop in your public support percentage, start thinking about what strategies and actions steps the organization could pursue if public support test falls below minimum levels.
It is impossible to predict whether and when these changes will go into effect, but DAF reform has been a topic of concern in recent years that is getting more and more attention from regulators and lawmakers. Nonprofits should be prepared for the possibility of change in this area.
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