Within a team, strengths complement weaknesses, and the sum of the whole is greater than its parts. Perhaps that is why so many trade associations also have a related 501(c)(3) foundation.

Trade associations, which are tax exempt under Section 501(c)(6) of the Internal Revenue Code, offer associations advantages beyond their tax-exempt status. For instance, they also can lobby, making them a powerful tool to represent an interest or industry. However, there are instances where the exemption status lacks flexibility, and consequently, most associations separate their foundations to carry on certain activities of the parent organization.

The inability to accept charitable support from the public is one such weakness of the exemption. While a significant amount of funding for associations comes from dues, rules exist that may prevent these dues from being fully deductible for the payee, and contributions are not deductible at all. Conversely, an affiliated foundation is encouraged to engage in charitable activities, such as research or scholarship funding, on behalf of the related association and in a mutual support agreement.

When creating a related foundation, the mission and funding will ultimately craft the underlying structure. However, the prevailing configuration is a foundation funded by external contributions with a mission to benefit the related association. The goal is to obtain funding from donors with a vested interest in your mission to subsidize member dues. In fact, the two most predominant structures in a bilateral relationship are:

• foundations receiving substantial support from a government unit or the general public
• foundations supporting an organization that satisfies public support prerequisites

Funding From Public Sources

To meet the standards of receiving a substantial amount of support from a government unit or the general public, the foundation is subject to an annual test when filing its Form 990. Combining the total contributions received in the current and previous four years and dividing that by (with a few exceptions, such as realized gains and losses) the total amount of revenue received over the same period, a public support percentage is calculated. The foundation must maintain a one-third minimum of public support to be compliant.

Funding industry programs is a competitive undertaking, and being able to offer potential backers a way to support them on a deductible basis can unlock new possibilities.

Still, variables exist that skew the complexity of this calculation. Neither realized gains and losses nor foundation program revenue can be included in the calculation. (Unlike a public support calculation under Section 509(a)(2) of the Internal Revenue Code.)

To ensure a foundation maintains a broad donor base, the law requires that contributions from donors giving more than 2 percent of the aggregate during the testing period be removed, forcing downward pressure on the public support percentage. It is imperative that a foundation maintains a robust database of donors due to this variable.

Supporting Organizations

Associations often use a supporting organization as the preferred method to form a foundation. As the name implies, a supporting organization is established for the sole purpose of supporting the parent organization that passes the IRS’s public support requirements. Usually, the relationship is formalized in organizing documents, such as the bylaws, asserting that the foundation is operating exclusively for the benefit of the parent organization.

There are three separate types of supporting organizations depending on the structure of the relationship. A robust governance favors a Type I supporting organization—the parent appoints a majority of the foundation’s board—or Type II supporting organization—a majority of board members overlap between both boards. Often, this parent organization is another charitable foundation; however, Regulation 1.509(a)-4(k) broadens the scope of this relationship to include trade associations exempt under 501(c)(6).

When a supporting organization files its Form 990, it reports the amount of monetary support transferred to the parent organization in the reporting year. It is important to remember the foundation forgoes the public support test on the basis that the supported parent will pass a separate public support test in its own right. While this test is not disclosed on the parent organization’s Form 990, a tax preparer should be performing this calculation annually to ensure it meets the standards under Internal Revenue Code 509(a)(2). This public support calculation is slightly altered from the previously defined formula in that it allows program revenue to be included as public support, but the one-third threshold still applies.

Funding industry programs is a competitive undertaking and being able to offer potential backers a way to support them on a deductible basis can unlock new possibilities. Maintaining this status through careful planning and trend analysis is crucial. And while finding the right structure is not always easy, it’s worth the forethought and cost of ensuring a proper filing.