New Treasury rules tighten oversight of supporting nonprofits — organizations designed specifically to provide support to a public charity. Here are five ways these rules may affect the relationship between supporting and supported organizations.
The Treasury Department recently issued new guidance to ensure that supporting organizations are serving the interests of their affiliated public charities. Supporting organizations are a special class of nonprofits under IRC Section 509(a)(3) that provide support to a standard public charity, known as their supported organization.
For any supporting organization under IRC Section 509(a)(3), a listing of the supported organization(s) is reported on the first page of Schedule A of their Federal Form 990. For each supported organization(s), the name, EIN number, type of public charity, and dollar amount(s) given to the supported organization by the supporting organization is listed. This area of the 990 is open to public inspection.
These new rules pertain to the prohibition on certain gifts or contributions to Type I and Type III supporting organizations from people who have control or influence over the charities they support. You can read the full regulations (T.D. 9981), which took effect on October 16, 2023, on the Federal Register.
All Type III supporting organizations now must provide annual written notification to each of their supported public charities.
Below, we’ve outlined several key takeaways that both supporting and supported nonprofit organizations should be aware of. Of course, if you have any questions about these new rules, reach out to Han Group or submit an RFP.
1. Tightened donor oversight
Type I and Type III supporting organizations are now prohibited from accepting contributions from people who have control or significant influence over the supported public charities. These regulations aim to prevent donors from using supporting organizations to improperly benefit themselves or maintain control over how their donation is used.
“Control” of an organization is not specifically defined but likely exists if a single donor or affiliated group holds 50% or more voting power on the board of the supported charity. An exception is made for supported organizations with five board members, none of whom have veto power and no more than two of whom are described as a “control person” or their family member.
2. New documentation
All Type III supporting organizations, whether functionally integrated or not, now must provide annual written notification to each of their supported public charities. The notification should describe the type and amount of support provided in the previous tax year. This includes a brief narrative and enough detail for the supported charity to identify and quantify the support.
The deadline for providing this annual notice is the last day of the 5th month of the organization’s fiscal year. For example, a calendar year filer would need to provide the notice by May 31, documenting the support provided in the prior year.
3. What constitutes ‘functionally integrated’ for Type III supporting organizations?
A supporting organization is deemed to be functionally integrated if the supporting organization exercises substantial direction and control over the policies, programs, and activities of the supported public charity.
In addition to being part of the same overall system (like a hospital network or health system), the supporting organization’s directors/officers must directly or indirectly appoint or elect a majority of the officers/directors on the board of the supported charity. The supporting organization must also have the ongoing power to remove and replace those board members of the supported charity or reappoint them frequently.
4. Qualifications for supporting governmental entities
When it comes to supporting a governmental entity, all agencies, departments, and divisions of that government are treated as a single “supported organization.”
Additionally, the definition of “geographic region” that a supporting organization can support has been expanded beyond just a region to also include a city, county, or metropolitan area.
5. Fundraising expenses
Reasonable fundraising expenses incurred by a supporting organization to solicit contributions for a supported public charity can count toward the supporting organization’s annual payout requirement. However, the amount that can count is capped at the amount of contributions actually received by the supported charity as a result of that specific solicitation.
To qualify, the supported charity must provide a written, signed report substantiating the contributions received from each solicitation by the due date of the supporting organization’s Form 990 filing.
