How to Qualify for Public Charity Status 170(b)(1)(a)(vi)

The Internal Revenue Service (IRS) classifies all 501(c)(3) organizations as either private foundations or public charities. This distinction governs the organization’s tax rules and the deductibility limits for its donors. Public charities receive preferential tax treatment compared to private foundations, which is a primary reason many organizations seek this status.

Donors who contribute to public charities benefit from higher deduction limits. For example, cash contributions are deductible up to 60% of a donor’s adjusted gross income (AGI) through 2025, a limit that will revert to 50% afterward. In contrast, donations to most private foundations are capped at 30% of AGI. One common route to this classification is qualifying as a publicly supported organization under Internal Revenue Code section 170(b)(1)(a)(vi).

The Public Support Tests for 170(b)(1)(a)(vi) Status

To qualify as a public charity under section 170(b)(1)(a)(vi), an organization must show that it receives a substantial portion of its financial support from the general public or governmental units. The IRS provides two methods to meet this requirement: the one-third mechanical test and the facts and circumstances test. These tests are designed to ensure that an organization is responsive to the public rather than a small group of private interests.

The first method is the one-third mechanical test, a mathematical calculation where an organization must show it “normally” receives at least 33.3% of its total support from public sources. Public sources include contributions from the general public, grants from governmental agencies, and donations from other public charities. The calculation is performed over a five-year aggregate period.

If an organization fails the mechanical test, it may still qualify under the alternative facts and circumstances test. To be eligible, the organization’s public support must be at least 10% of its total support. If this 10% floor is met, the organization must also prove it functions as a publicly supported entity by maintaining a continuous program to solicit public funds and having a governing body that represents public interests.

The facts and circumstances test offers flexibility for organizations that have public backing but fall short of the one-third requirement. The IRS will consider factors such as the diversity of funding sources, the extent of public participation in programs, and the organization’s efforts to attract new public support. Successfully navigating this test requires demonstrating a consistent effort to be accountable to the public.

Calculating the Public Support Fraction

The public support test is a fraction measuring an organization’s reliance on public funding. The calculation involves a numerator, representing qualifying public support, and a denominator, representing total support.

The numerator of the fraction, known as public support, is composed of funds from specific sources. This includes grants from federal, state, or local government units, contributions from other public charities, and direct or indirect contributions from the general public. These are the revenue streams that the IRS considers to be indicative of broad public interest.

A rule that applies to the numerator is the 2% limit. When calculating public support, contributions from any single individual, trust, or corporation are only includable up to an amount equal to 2% of the organization’s total support for the measurement period. For example, if total support over five years is $500,000, the 2% limit is $10,000. If an individual donated $25,000, only $10,000 would count in the public support numerator.

The denominator is “total support,” a broader measure of revenue that includes all grants and contributions before the 2% limit is applied. Additionally, total support encompasses gross investment income, such as interest and dividends, and any net income from unrelated business activities. This figure represents the organization’s entire financial resource base for the period.

Certain income is excluded from the total support denominator, most commonly unusual grants and gross receipts from mission-related activities. An unusual grant is a substantial contribution from a disinterested party that is unexpected and would adversely affect the organization’s public charity status. Gross receipts from mission-related activities, like ticket sales for a museum, are also excluded as they are considered earned revenue, not contributions.

Required Information and Documentation for Form 1023

Organizations seeking this status must apply to the IRS using Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3).” The application requires detailed information about the organization’s purpose, activities, and financial history.

A component of the application is Schedule A, which is used to demonstrate that the organization meets a public support test. Applicants must provide detailed financial data on Schedule A for the most recent four or five tax years, or for the years the organization has existed if new. This financial information must be categorized to align with the public support calculation.

The required financial data includes a breakdown of all revenue, with separate listings for grants from government units, contributions from other public charities, and all other contributions. The data must be presented to allow for the application of the 2% limit. The form requires the applicant to calculate total support and qualifying public support according to IRS definitions.

On Schedule A, the applicant enters the categorized financial data to calculate the public support percentage. The form provides lines for the numerator (public support) and the denominator (total support) to compute the final fraction. The current version of Form 1023 and its instructions are available on the IRS website.

The IRS Application and Ruling Process

After completing Form 1023 and Schedule A, the organization submits the application electronically to the IRS via the Pay.gov portal. Upon submission, organizations will receive either a definitive ruling or an advance ruling.

A definitive ruling is for organizations with a financial history of at least five years that proves they meet the public support test. Their application relies on historical data to demonstrate compliance. New organizations without a sufficient operational history can request an advance ruling, which allows them to be treated as a public charity for their first five years if they can show a reasonable expectation of meeting the test. At the end of this period, the organization must demonstrate on its Form 990 that it has met the test.

After submission and payment of the user fee, the application is assigned to an IRS specialist for review. The user fee for filing Form 1023 is $600, while the streamlined Form 1023-EZ has a $275 fee. The reviewing agent may have follow-up questions or request additional information. Once the review is complete, the IRS issues a determination letter that grants or denies the requested status and classification.

Maintaining Public Charity Status Annually

To maintain public charity status, an organization must annually demonstrate it meets the public support test through filings with the IRS. Each year, a public charity must file Form 990, “Return of Organization Exempt From Income Tax.” A part of this return is Schedule A, “Public Charity Status and Public Support,” which requires the organization to recalculate its public support percentage.

The public support calculation on Schedule A is performed on a rolling five-year basis, which includes the current filing year and the four preceding years. This moving average approach provides a stable, long-term view of the organization’s funding structure and prevents its status from being jeopardized by a single atypical year. The information provided on this schedule is made public.

Failing to meet the public support test has consequences. If an organization’s public support percentage falls below the required threshold for two consecutive years, the IRS may reclassify it as a private foundation. This reclassification subjects the organization to more restrictive operating rules and less favorable tax treatment for its donors, potentially hindering its fundraising and programmatic efforts.