What Is a 509(a)(1) Public Charity?

The Internal Revenue Service (IRS) provides tax-exempt status to organizations under Section 501(c)(3) of the Internal Revenue Code. These organizations are divided into two main categories: public charities and private foundations. The rules governing their operations and the tax treatment of donations they receive differ significantly. For many organizations, achieving public charity status is a primary goal due to the more favorable regulations and donor incentives. An organization can qualify as a public charity in several ways, and the classification ultimately depends on its sources of financial support.

Defining Public Charity Status

A public charity under Section 509(a)(1) is an organization that the IRS deems to be publicly supported. This classification distinguishes these entities from private foundations, which rely on a small number of donors and are subject to more stringent operating rules and excise taxes. This distinction affects an organization’s operational freedom and its ability to attract donations, as donors receive more favorable tax deductions for contributions to public charities.

Some organizations are automatically classified as public charities due to their inherent public nature. These include entities like churches, schools, and hospitals, which are considered to serve a broad public purpose by their function. For organizations that do not fall into these categories, qualification as a 509(a)(1) public charity hinges on demonstrating broad financial support from the general public, governmental units, and other public charities.

The Public Support Test

To qualify as a 509(a)(1) public charity, most organizations must satisfy a mathematical formula known as the public support test. This test measures the proportion of an organization’s funding that comes from public sources versus a small number of substantial contributors. The primary threshold requires an organization to demonstrate that at least one-third (33.3%) of its total support is derived from the general public over a five-year measurement period.

The first step is to determine the organization’s “total support.” This figure includes a wide range of revenue sources, such as gifts, grants from individuals and corporations, government grants, and membership fees. It also encompasses gross receipts from activities related to the organization’s exempt purpose, though certain “unusual grants” as defined by the IRS may be excluded from this calculation.

Next, the organization calculates its “public support,” which is the numerator in the public support fraction. This includes grants from governmental agencies and contributions from other public charities in full. However, for contributions from individuals, corporations, or private foundations, a limitation applies. Any amount from a single donor that exceeds 2% of the organization’s total support for the measurement period is not counted as public support. For example, if an organization’s total support is $500,000, the 2% limit is $10,000, so if a donor gave $25,000, only $10,000 would be included in the public support calculation.

For organizations that do not meet the 33.3% threshold, an alternative “facts and circumstances” test is available. This allows an organization to qualify if its public support is at least 10% of its total support. To use this alternative, the organization must also demonstrate that it is organized and operated to attract new and continuous public or governmental support. This involves showing evidence of an active and ongoing fundraising program.

Required Information for Classification

To demonstrate eligibility for 509(a)(1) status, an organization must present specific financial data on Schedule A of Form 1023, the Application for Recognition of Exemption. The core of Schedule A requires a detailed breakdown of the organization’s financial support over a five-year period. The applicant must categorize its revenue according to the definitions used in the public support test, separating it into categories such as gifts, grants, membership fees, and gross receipts from mission-related activities. This financial data directly populates the lines on the form used to calculate the public support percentage.

A part of this preparation involves creating a detailed schedule of contributors. For each of the preceding five fiscal years, the organization must list every donor who contributed more than 2% of the organization’s total support for that period. This supporting schedule requires the name of the contributor and the total amount of their donations. The IRS uses this information to apply the 2% limitation rule, distinguishing between public support and funding from substantial donors.

New organizations without a five-year history will provide financial projections for their first five years of operation.

The Application and Determination Process

Once an organization has gathered all necessary information, the application package is submitted electronically through the federal government’s Pay.gov portal. This requires creating an account and paying the required user fee of $600. After the electronic submission is complete, the organization will receive an acknowledgment of receipt from the IRS, indicating the application has entered the processing queue.

The timeframe for a full review can vary, ranging from a few months to over a year, depending on the application’s complexity and the IRS’s current workload. During this period, it is important for the organization to be prepared for potential follow-up. An IRS Exempt Organizations specialist may contact the organization to request clarification on its activities, governance, or the financial data provided in the application.

The final step is the receipt of a determination letter from the IRS. If the application is approved, this official document confirms the organization’s tax-exempt status under Section 501(c)(3). The letter will also specify the organization’s public charity classification under Section 509(a)(1), solidifying its status. This letter is a permanent record that the organization should keep and can provide to donors to verify its charitable status.