IRS Public Support Test
What Is It and How Is It Calculated
Nonprofits who function as public charities must pass the public support test in order to remain classified as a public charity. Failing the test will have serious consequences as it will cause the public charity to be reclassified as a public foundation.
The public support test is meant to confirm that a public charity has a broad base of public support. It confirms that the charity is supported by the general public with at least 33% of revenue coming from small donors who give less than 2% of the organization’s revenue, from other public charities, and/or from the government. The test is included as part of the organization’s annual tax filing to the IRS and is calculated on a five-year cumulative basis – not on an individual year. The IRS does not require public charities to demonstrate public support until year six of operations.
Thus, in essence, an organization that has cumulative revenues over the past six years of $1,000,000 must have at least $333,000 (33% of revenues) come from donors who contributed less than $20,000 each (2% of revenues).
However, the exact calculation can be more complicated. When calculating the public support for an organization, the nonprofit must review its original Form 1023, which is submitted to the IRS when the nonprofit applies for 501c3 status, to determine the organization’s subcategory: 509a1, 509a2, 509a3, and 509a4. These subcategories provide the IRS with the organization’s purpose, programs, and revenue sources – all of which are important when calculating the public support test. This is because donations received from other public charities is often considered public support, but not always. This is where the subcategories will become important. Given this complexity, it is always best to have the public support test completed by a tax professional, if possible.
Lastly, there is also a “facts and circumstances” test which allows a public charity who fails to pass the public support test to still be classified as a public charity as long as the organization’s public support is at least 10%. This test is a essentially a subjective request to the IRS to allow the organization to retain charity status with the understanding that the organization is actively working to increase its public support up to the 33% threshold, and there’s no guarantee that the IRS will grant the request. It is possible to fail the public support test multiple years in a row but still pass the facts and circumstances test to retain public charity status. However, if public support drops below 10%, the organization will be reclassified as a public foundation.
Public charities that are reclassified to a private foundation could potentially lose donors given the tax deductibility limitations for private foundations. In addition, these organizations will be required to file Form 990-PF for the past six years given the change in status. And, the organization will not be allowed to convert back to a public charity for at least the next five years.