Will nonprofit convert to private foundation if it gets $1 million gift?

You are correct to be concerned about the chance that a single big contribution to a small nonprofit could cause the organization to lose its status as a public charity and convert automatically to a private foundation subject to significant limitations on its activities.  (See Ready Reference Page: “Calculating Public Support”) But you will probably be able to avoid that conversion if you get your support from a variety of sources.

The public support calculation is made over a five-year rolling period.  If you are going from $250,000 ($50,000 of current revenue a year) to $6.25 million over five years because of contributions and not new sources of fees for charitable services, you will be evaluated as a public charity under Sections 509(a)(1) and 170(b)(1)(A)(vi) of the Tax Code.  Although you will automatically qualify as a public charity if one-third of your support comes from what I call “qualified” contributions, you can still qualify under a “facts and circumstances” test with as little as 10% of public support.

The key factor in the calculation is how much of the gift of any individual donor (other than another public charity or a governmental unit) is excluded from the numerator of the fraction in the calculation.  In your case, if you received total support of exactly $6.25 million in your five years under calculation, the 2% number would be $125,000.  The amount of any gifts totaling more than $125,000 (other than a gift from a public charity or governmental unit) from any single donor over the five years of the calculation would be excluded from the calculation.  In your case, if all other donors gave $125,000 or less, $875,000 from your $1 million donor would be excluded. Your public support would be 86% ($6,250,000 minus $875,000=$5,375,000/$6,250,000).  The more gifts you get from individuals, private foundations or corporations totaling more than $125,000 each during the period, the more the excess for each donor would reduce your public support percentage.  But you could lose a lot of excess before you would go below 33 1/3% and would have to lose almost the entire $6 million before you go would go below 10%.  (You will see that calculation below.)

You can reduce the limitation on big individual gifts if you can get the donors to give through their donor advised funds, because those gifts would technically be from another public charity and not be limited in the calculation.

You specifically asked about another way to exclude a huge grant from the calculation, by classifying it as an “unusual grant.”  If your donor gave the entire $6 million needed for the building instead of a measly $1 million and if that was the only support you got in excess of your normal $50,000 a year, your public support would be only 6% ($6,250,000 minus $5,875,000=$375,000/$6,250,000).  You would then need to do something get to at least 10% public support.

Treasury Regulations allow an “unusual grant” to be excluded from both the numerator and the denominator of the calculation if (1) it is received by reason of the public nature of the organization, (2) is unusual or unexpected because of its size, and (3) because of its size would cause the organization to flunk the public support test. The Regs do not specifically recognize the fact that the gift was given for capital facilities rather than general operations, but that would be one of the “facts and circumstances” of the situation.

As you can see, these calculations change slightly with every dollar you receive in support during the five-year period. But you can also see that it is hard to fail to meet the minimum requirement. You are right to think about the issue, but you don’t really need to worry.  You have a lot of ways to assure that you continue to qualify as a public charity.