How to Pass the Public Support Test in the First Five Years

A public support test is a financial assessment used by the Internal Revenue Service (IRS) to ensure a 501(c)(3) organization is a public charity and not a private foundation. The test’s purpose is to demonstrate that a charity is responsive to a broad base of public support rather than the interests of a small number of private donors. For new organizations, the IRS provides an initial five-year period to build a record of public support before this test must be formally passed.

The Initial Five-Year Period

When a new organization applies for 501(c)(3) status using Form 1023, it indicates whether it expects to be publicly supported. If it does, the IRS grants it an initial five-year period where it is automatically treated as a public charity. This is a presumptive status, not a formal ruling, and it allows the organization to operate as a public charity from day one.

The primary benefit of this status is for fundraising, as donors can make contributions with the assurance that their donations will receive the more favorable tax-deductible treatment associated with public charities. This status allows the organization to build its programs and fundraising capacity without the immediate pressure of passing the support test. The five-year clock starts from the beginning of the organization’s first tax year and concludes at the end of its fifth.

Required Financial Tracking for the Test

From its inception, an organization must diligently track its finances to prepare for the public support test. This begins with categorizing all revenue to distinguish between “Total Support” and “Public Support.” Total support is a broad measure that includes nearly all income, such as gifts, grants, contributions, membership fees, gross receipts from mission-related activities, net income from unrelated business activities, and gross investment income.

Public support, the numerator in the test’s calculation, is a specific subset of total support. It primarily includes funds from government agencies, other public charities, and the general public. It is necessary to maintain detailed records of every donation’s source and amount.

For organizations that may use an alternative test, the rules differ slightly. This test allows for the inclusion of gross receipts from mission-related activities in the public support calculation but places strict limits on support from disqualified persons, such as board members or substantial contributors, and on investment income. Accurate and detailed bookkeeping from day one is the only way to ensure these complex calculations can be performed correctly after the five-year period.

Calculating Public Support After Five Years

After the conclusion of the fifth tax year, the organization must use the cumulative financial data it has tracked to calculate its public support percentage. This calculation determines if the organization has met the requirements to be confirmed as a public charity. There are two primary tests an organization can use, and it only needs to pass one.

The most common test requires public support to be at least 33.33% of total support for the five-year period. For example, if an organization’s total support over five years was $1,000,000, and it received a single large donation of $100,000, only $20,000 (2% of $1,000,000) of that donation would count as public support. If the organization fails to meet the one-third threshold, it may still qualify under a 10% “facts and circumstances” test, which requires showing it has a public support level of at least 10% and maintains an active program to attract broad public contributions.

The second test is a two-part requirement. First, the organization must receive more than one-third of its support from a combination of gifts, grants, and gross receipts from activities related to its exempt purpose. Second, it must not receive more than one-third of its support from gross investment income and net unrelated business income. This test is often used by organizations that generate significant revenue from mission-related services, like ticket sales or class fees.

Reporting on Form 990

The public support test calculation is not submitted on a special form; instead, it is integrated into the organization’s annual tax filing. The calculation is performed and reported on Schedule A of Form 990, “Public Charity Status and Public Support.” An organization completes this schedule for the first time on the Form 990 filed for its fifth tax year, which is submitted during its sixth year of operation.

Schedule A uses the cumulative financial data from the entire initial five-year period to compute the public support percentage. The form is structured to guide the organization through the calculation, with separate parts for the different public charity tests.

Based on the information reported on this Schedule A, the IRS makes its final determination. If the organization successfully meets one of the tests, its status as a public charity is confirmed. If it fails, the organization will be reclassified as a private foundation, a status that comes with more restrictive operating rules and less favorable tax treatment for its donors.