What Is IRS 509(a)? Qualifying as a Public Charity

For any organization seeking tax-exempt status under Internal Revenue Code (IRC) Section 501(c)(3), its classification under Section 509(a) is a key distinction. This section of the tax code is the primary mechanism for distinguishing between public charities and private foundations. The distinction shapes an organization’s operational requirements, its ability to attract donations, and its relationship with the IRS. After establishing a charitable purpose, an organization must determine its foundation classification, with public charity status being preferred for its more favorable regulatory framework.

The Public Charity Presumption

Under the Internal Revenue Code, any organization qualifying for tax exemption under Section 501(c)(3) is automatically presumed to be a private foundation. An organization can overcome this default classification only by demonstrating it meets the criteria for a public charity under Section 509(a). Private foundations are often funded and controlled by a small number of sources, like a single family or corporation.

Public charities operate under less stringent regulations. Private foundations are subject to a host of complex rules and excise taxes designed to prevent abuse, such as restrictions on self-dealing with major donors, minimum annual distribution requirements, and limits on holdings in private businesses. These regulations add a layer of administrative complexity that public charities largely avoid.

The deductibility limits for donors are also more generous for contributions to public charities. An individual can deduct contributions up to 60% of their adjusted gross income for cash gifts to public charities, while the limit for gifts to most private foundations is 30%. This difference can be a substantial factor for an organization’s fundraising success.

Qualifying as a 509(a)(1) Public Charity

The most common path to public charity status is through Section 509(a)(1). Certain institutions are automatically considered public charities by the nature of their activities. These include:

• Churches
• Schools
• Hospitals
• Medical research organizations

For other organizations, qualification hinges on a mathematical public support test. To pass, an organization must normally receive at least one-third of its total support from public sources over a five-year testing period. If an organization cannot meet this threshold, it may still qualify under a “facts and circumstances” test if its public support is at least 10% of its total support and it actively seeks public contributions.

Public support includes government grants, contributions from other public charities, and individual donations. When calculating the public support numerator, a contribution from a single source (including from a disqualified person like a director) is only counted up to 2% of the organization’s total support for the five-year period. Any amount above this 2% limit is included in total support but not public support. This rule ensures that a charity is not dependent on a small number of major donors.

Qualifying as a 509(a)(2) Public Charity

An alternative route to public charity status is under Section 509(a)(2), for organizations that receive revenue from both public contributions and fees for mission-related services, like a museum charging admission. This category uses a distinct two-part test.

The first part is a public support test, requiring the organization to normally receive more than one-third of its support from gifts, grants, contributions, and gross receipts from mission-related activities. Support from disqualified persons is excluded from the public support calculation. Gross receipts from any single person or government agency are includable only up to the greater of $5,000 or 1% of the organization’s total support for that year.

The second part is an investment income test, which requires that the organization normally receive no more than one-third of its total support from gross investment income and unrelated business income. This ensures the organization remains focused on its public-facing programs rather than functioning like an endowment. An organization must satisfy both tests to qualify under this section, as there is no “facts and circumstances” alternative.

Supporting and Public Safety Organizations

Beyond the more common classifications, Section 509(a)(3) designates a “supporting organization,” an entity that is not publicly supported on its own but achieves public charity status by maintaining a close relationship with one or more established public charities. Its purpose is to support the work of these other organizations, either financially or by carrying out certain functions on their behalf.

The relationship between a supporting organization and the charity it supports falls into three types. A Type I organization is operated, supervised, or controlled by its supported organization. A Type II organization is supervised or controlled in connection with its supported organization. A Type III organization is “operated in connection with” its supported organization and is subject to more complex rules to ensure it is responsive to the supported charity’s needs.

A narrower category exists under Section 509(a)(4) for organizations operated exclusively for testing for public safety. These organizations carry out tests on products to determine their safety for the public.

Demonstrating and Maintaining Public Charity Status

An organization must declare and justify its public charity status to the IRS when it files Form 1023, Application for Recognition of Exemption. On this form, the organization selects the clause under Section 509(a) it believes it qualifies for and provides supporting financial data.

New organizations without a financial history are typically granted an “advance ruling.” This gives the organization a five-year period to establish that it can meet the chosen public support test, during which it is treated as a public charity. At the end of the five years, the organization must demonstrate it met the requirements.

Maintaining public charity status is an ongoing requirement. Each year, most 501(c)(3) organizations must file Form 990, Return of Organization Exempt From Income Tax. As part of this filing, public charities complete Schedule A, Public Charity Status and Public Support. This schedule requires the organization to perform its public support calculation based on a rolling five-year lookback period to ensure it consistently meets the rules for its classification.