Issue

In order to utilize the “Special Rule” at Schedule B (Form 990), the IRS requires colleges (and others) to now complete Schedule A (Form 990), Part II.  This may cause significant extra work with regard to completing Form 990 for many institutions.

Situation

Saltwater Christian College (SCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and section 170(b)(1)(A)(ii).  SCC’s accounting team has a few questions as we begin to work on their June 30, 2016 Form 990.  They want to know why we have sent them a copy of Schedule A, Part II (Support Schedule for Organizations Described in Sections 170(b)(1)(A)(iv) and 170(b)(1)(A)(vi)) and asked for a conference call to talk about filling out this part of the return.

SCC says, “We are a school under and section 170(b)(1)(A)(ii) and have never filled out this “support schedule” before.”

We say, “You are correct.  But, there is a new stipulation promulgated by the IRS in the Schedule B (Form 990) instructions that now requires the completion of Schedule A, Part II – or you would be required to complete Schedule B under the “General Rule” and report all donors who gave more than $5,000.”

SCC says, “What does completing Schedule A, Part II entail?”

We say, “Among other items, we need to gather five years’ worth of revenue data such as total contributions; amounts given each year by large donors; gross income from interest, dividends, etc.; net income from unrelated business activities; gross receipts from related activities.”

SCC says, “Why would we not want to just use the “General Rule?”

We say, “Great question.  Three of the reasons are…”

1) Reporting all donors who gave more that $5,000 can be cumbersome (maybe hundreds of donors would need to be listed);

2) Several states are requesting/demanding copies of Schedule B and it may make sense to minimize the number of donors reported for “security” and donor care reasons; and

3) new rules on Schedule L make “substantial donors” part of your list of “interested persons” – and anyone listed on Schedule B is now a “substantial donor”.

Thus, filling out Schedule A, Part II each year – although adding to your administrative burden – may ultimately lessen your bureaucracy load and also help in other areas.

Rules

From Schedule B (Form 990) Instructions:

Special Rules

Section 501(c)(3) organizations that file Form 990 or 990-EZ. For an organization described in section 501(c)(3) that meets the 331/3% support test of the regulations under sections 509(a)(1) and 170(b)(1)(A)(vi), and not just the 10% support test (whether or not the organization is otherwise described in section 170(b)(1)(A)), list in Part I only those contributors whose contribution of $5,000 or more during the tax year is greater than 2% of the amount reported on Form 990, Part VIII, line 1h(A), or Form 990-EZ, line 1. An organization that claims the benefit of this special rule must either (1) establish on Schedule A (Form 990 or 990-EZ), Part II, that it met the 331/3% support test for the current year or prior year, or (2) check the box on Schedule A (Form 990 or 990-EZ), Part I, line 7 or 8, and the box on Schedule A, Part II, line 13, as a section 170(b)(1)(A) (vi) organization in its first five years.

From the Schedule L (Form 990) Instructions:

  1. A substantial contributor. For purposes of Schedule L, Parts II-IV, a substantial contributor is an individual or organization that made contributions during the tax year in the aggregate of at least $5,000 and is required to be reported by name in Schedule B (Form 990, 990-EZ, or 990 PF), Schedule of Contributors, for the organization’s tax year.

**NOTE: One of the colleges we talked with has historically reported four contributors on Schedule B using the “Special Rule”.  If they are required to use the General Rule, they would have to report approximately 125 contributors – a Schedule B that would be more than 25 pages long.

Bottom Line

Filling out Schedule A, Part II will take some information gathering that most schools have not historically been involved in.  Make sure you work with a qualified, knowledgeable tax advisor on this.  He or she will be able to help your school navigate the various rules/laws/codicils that are out there.

Specific questions? Email Dave Moja.

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.