Tipping Law

Can receiving a grant move your organization’s status into a “private foundation” status? While the answer is complex, the short and simple answer is yes, it is possible. A nonprofit organization is set-up with a public interest purpose, classified as a 501(c)(3) charitable organization. Therefore, public support is required and there are two tests, which include variables, that can help determine whether an organization is a “publicly supported” organization. These tests are important in avoiding the classification of being treated as a private foundation. Private foundations are subject to more rules than other 501(c)(3) organizations.

Before a brief description of the public support tests, it should be noted that there are organizations that are automatically exluded from the private foundation category, which include churches, educational organizations, hospitals, and a few others.

1. The One-Third Test (Section 509(a)(1) and 170(b)(1)(A)(vi) Test): An organization/group receives a “substantial” (one third) amount of its support from government or foundation grants or from general public contributions. The formula for the public support fraction (one third) looks simple, but there are lots of rules about what kinds of money count toward “public support” and “total support.” The formula is: Public Support/Total Support * 100 = Public Support Percentage. Factors to consider when computing the numbers include whether grant money is earned for services, contributions from a single source (other than a governmental unit or an organization that is excluded from private foundation status under this test) beyond two percent of a year’s total support and more.

2. The Double Thirds Test (Section 509(a)(2) Test): This test is used for organizations/groups that cannot qualify under the “one-third tests” and includes “related gross revenues.” If your oganization/group operates a business that furthers your exempt purposes, those revenues would be included under this test and would count toward both “public support” and “total support.” Under this test, however, you must also show that no more than one-third of your “total support” comes from the combination of gross investment income and unrelated business income.

More detailed information can be obtained from IRS Regulations section 1.509(a)-3(c)(5)(ii).

Kathy Grochow, NRS, St. Cloud