What Is the Public Support Test for a Public Charity?

The public support test helps tax-exempt organizations maintain their classification as public charities under the U.S. tax code. This test ensures that a substantial portion of an organization’s financial backing comes from the general public rather than from a limited number of sources. It helps differentiate them from private foundations. The Internal Revenue Service (IRS) employs this test to confirm that charitable organizations serve a wide community interest, aligning with the benefits of their tax-exempt status.

Understanding Public Charity Status

Public charities generally benefit from higher deductibility limits for donors, which can encourage greater philanthropic contributions. For instance, donors contributing to public charities typically can deduct up to 50% of their adjusted gross income, while those giving to private foundations may face a limit of 30% or less. Public charities also operate with fewer restrictions on their activities and are subject to less stringent excise taxes compared to private foundations.

This distinction influences an organization’s operational flexibility and the tax advantages afforded to its supporters. The specific category under which an organization qualifies as a public charity often dictates which public support test it must meet. The IRS recognizes various types of public charities, each with unique criteria for demonstrating public support.

Public Support for Organizations Primarily Publicly Supported

Organizations that primarily receive support from governmental units or direct and indirect contributions from the general public, often referred to as 509(a)(1) public charities, follow a specific public support test. This test requires an organization to normally receive at least one-third (33 1/3%) of its total support from these public sources over a five-year period.

For this test, “public support” includes contributions from individuals, but with a limitation: contributions from any one individual are counted only up to 2% of the organization’s total support over the five-year period. Gifts and grants from governmental units and other publicly supported charities are generally fully counted towards public support, without being subject to the 2% limitation.

Amounts received from “disqualified persons” are excluded from public support for this test. Disqualified persons include substantial contributors, who are individuals or entities that have given more than $5,000 and more than 2% of the organization’s total contributions from its inception, as well as foundation managers. If an organization does not meet the 33 1/3% threshold, it may still qualify as a public charity under a “facts and circumstances” test if it receives at least 10% of its support from public sources. This alternative requires demonstrating that the organization is actively working to attract broad public support and has a continuous fundraising program.

Public Support for Organizations with Diverse Support

Organizations that receive support from a broader range of sources, including gross receipts from activities related to their exempt purpose, are often classified under Section 509(a)(2) and are subject to a two-part public support test. This test applies to charities that generate revenue from selling services or materials to the public, such as admission fees or program fees.

The first part of this test, the public support test, requires the organization to normally receive more than one-third (33 1/3%) of its total support from governmental units, contributions from the general public, membership fees, and gross receipts from activities related to its exempt function. Gross receipts from related activities, such as admissions or performance of services, are included in this calculation. However, there is a limitation on these gross receipts: amounts received from any one person or governmental unit for exempt-purpose-related activities are counted only up to the greater of $5,000 or 1% of the organization’s total support for that year. This limitation applies annually, not cumulatively over the five-year period.

The second part of the test, the investment income test, stipulates that the organization must normally receive not more than one-third (33 1/3%) of its total support from gross investment income and unrelated business taxable income. Gross investment income includes interest, dividends, rents, and royalties. Unlike the public support test for organizations primarily publicly supported, there is no “facts and circumstances” alternative if a 509(a)(2) organization fails the 33 1/3% public support threshold.

Ongoing Public Support Compliance

Maintaining public charity status requires continuous monitoring and adherence to the public support tests. Organizations calculate their public support over a five-year averaging period, which includes the current tax year and the four preceding tax years.

Annual reporting of public support calculations is done on IRS Form 990. Public charities use Schedule A of Form 990 to report their public support levels. Organizations primarily publicly supported (509(a)(1) types) complete Part II of Schedule A, while those with diverse support (509(a)(2) types) complete Part III.

If an organization fails the public support test for two consecutive years, it risks reclassification as a private foundation. This reclassification can lead to more restrictive regulations and potentially reduced donor incentives.