Though revisions to Form 990 Schedule A for the 2014 filing year include changes that will affect a range of tax-exempt organizations (see our February 2015 article), a majority will impact organizations operating as IRC Section 509(a)3 supporting organizations, in particular Type III supporting organizations.
Tests for Types I, II, and III
All supporting organizations are subject to an organizational test, an operational test, a control test, and a relationship test, which they must meet in order to maintain their status. There are three types of supporting organizations (or four, if you consider that there are two Type III subtypes), classified based on how they meet the relationship test:
- Type I. These supporting organizations have a parent-subsidiary relationship, typically indicated by the supported organization’s power to appoint or elect a majority of the supporting organization’s directors or trustees.
- Type II. These supporting organizations have a brother-sister relationship, typically indicated by overlap of a majority of the directors or trustees of both the supporting and supported organization.
- Type III. These supporting organizations operate in connection with one or more publicly supported 501(c)(3) organizations.
Type III supporting organizations aren’t subject to the same level of control from their supported organizations as Type I and Type II. As such, in addition to the tests mentioned above, they also have to meet a notification requirement and pass separate responsiveness and integral tests. Type III organizations are further sorted into two classes: functionally integrated and nonfunctionally integrated. This classification is based on whether the supporting organization meets the integral test.
The revisions to Schedule A focus primarily on what’s required to meet these tests, especially for Type III organizations.
Consequences of Classification
In addition to the extra burden of meeting the tests above and disclosure of the tests’ results on Schedule A, supporting or supported organizations are considered related entities for Form 990 reporting purposes. This creates a domino effect of additional reporting on their tax return.
First, supporting or supported organizations are required to complete a Schedule R to disclose transactions between related entities. Additionally, if any directors or trustees on the supporting organization’s board are paid by related entities, their compensation must be disclosed in Part VII of Form 990. Compensation for these purposes includes salary and benefits, such as employer contributions to retirement plans and employer-provided health insurance.
Changing Your Determination
The reporting requirements for supporting organizations can be burdensome, but depending on your revenue sources, supporting organizations may be able to meet the public support tests under Section 509(a)(1) or 509(a)(2), which would warrant a different tax determination. These tests prove to the IRS that your organization operates on general public support rather than the support of another publicly supported organization. If you can meet them, you can file a change in determination with the IRS using Form 8940, Miscellaneous Determination Requests. For the IRS to review your sources of revenue, you’ll need to supply a completed Schedule A and a $400 user fee.
Note that a change in determination doesn’t change your status as a 501(c)(3) not-for-profit. It merely changes the type—from supporting organization to publicly supported organization.
For more information on your filing status, Form 990 requirements, or the Schedule A revisions, contact your Moss Adams not-for-profit professional.