The public support test is one of the most misunderstood concepts in the nonprofit world, so today, we’re shedding some light on the topic. The public support test is a way for the IRS to make sure that nonprofit organizations are supported by a broad base of the public, rather than just a few big donors. For 501(c)(3) public charities, it’s crucial to understand what the public support test for 501c3 organizations is and ensure your organization passes it. If you do not pass the test, your organization could be reclassified as a private foundation. Public charities are required by the IRS to meet the test in order to keep their standing as a charity.
There are two different versions of the public support test and we’ll cover both of them briefly. Your organization only needs to pass one version of the test in order to be a public charity by IRS standards. Fair warning, the calculations and regulations for this test can be complex, so it can be useful to have an attorney well-versed in tax exempt law to help answer any complex questions.
Note: if your organization is tax exempt as a 501(c)(4), a private foundation, or any kind of non-c-3 designation, the public support test does not apply to your organization. Private foundations have different requirements they need to meet.
What are the two versions of the public support test for 501c3 organizations?
- The more widely-used version of the public support test is called the 509(a)(1) public support test. In order to pass this version of the test, you’ll need to be able to show that at least 1/3rd (or 33.3%) of your revenue comes from the general public. The IRS has specific requirements for who counts as “the general public” and we’ll show you how to calculate it based on those requirements below. Another way to pass the 509(a)(1) test is through the 10% facts and circumstances test. This requires that less than 33% but more than 10% of your revenue must come from the general public (still using the formula below), and the organization has to have a continuous, legitimate fundraising program that is attempting to gain donations from sources that count towards the general public (donations from individual donors, government grants, etc.).
- The second test is the 509(a)(2) public support test. In this version of the test, at least ⅓ (or 33.3%) of a nonprofit’s funding should come from donations from the general public (according to IRS standards) combined with program service income. Essentially, this means you’d combine the amount your organization made from providing your charitable services (which could include things like adoption fees for an animal shelter or ticket sales to a performance) with the amount calculated below as your donations from the general public. Nonprofits looking to pass this test rather than the 509(a)(1) test are subject to a few more limitations generally. For example, the amount of gross investment income and unrelated business income needs to equal less than ⅓ of your total funding.
Does my nonprofit pass the public support test for 501c3s?: How to calculate the percentage of public support
The support test requires that a public charity must receive at least one-third of its support from donors who give less than 2% of the charity’s total donations over the past five years. So to find out if your organization passes the public support test for 501c3s, you’ll need to know the amount of donations your organization has received each year for the last five years. We’ll walk through the step-by-step calculations below.
For new charities, the first year of your organization’s existence will not count when calculating if you pass or fail the test, so you’ll start with year two. This can be helpful if just a handful of people or organizations helped get the organization up and running with initial funding. Your nonprofit doesn’t have to pass the public support test until you have five full years of donations to work with excluding the first year. This means that the IRS doesn’t require a public charity to demonstrate their public support status until the sixth year of existence, but it’s important to keep it in mind in the early years, as those years will count towards the organization passing or failing the test.
Step 1: Calculate Total Donations Over 5 years (current tax year + 4 previous)
Calculate your total donation amount by adding all donations over the 5-year period (your current tax year and the four (4) previous years, excluding your first year of existence if applicable).
Example: Charity A’s donations over the 5-year period is $100,000.
Step 2: Organize Your Donations Per Donor
If you haven’t already done so, calculate the sum of your donations, per donor, over the last five years. (If Donor X donated $500 for years 2, 3, and 5, you’ll add those amounts to get a total donation of $1,500 over the 5-year period from Donor X). Note, many donations that come from other public charities are considered public support (as long as that other charity passes test 509(a)(1) mentioned above) . So Charity B in the example below will track what happens with those gifts from other public charities that meet the first public support test for 501c3s. Government Grants also count as public support fully, so we’ll track that with Grant Z in the example below. Donations from private foundations are subject to the 2% rule like donations from individuals. We will track this with Foundation C in the below example.
Example:
| Donor Name | Donation Amount |
| Donor A | $15,000 |
| Donor B | $5,000 |
| Donor C | $1,000 |
| Donor D | $3,000 |
| Foundation C | $35,000 |
| Donor E | $7,000 |
| Charity B | $8,500 |
| Donor F | $500 |
| Grant Z | $25,000 |
Step 3: Calculate 2% of Your Donations
Take .02 x your total donations for the 5-year period (calculated in Step 1).
Example: .02 x $100,000 = $2,000
This means that $2,000 equals 2% of my donations over the last 5 years.
Step 4: Take 2% from each donation, except those from qualifying charitable organizations.
Since $2,000 is 2% of our donations over the last 5 years (as we calculated earlier), we’ll take $2,000 from each donation. If a donation is less than $2,000, just take the full amount of the donation for this part of the calculation.
Example:
| Donor | Total Donations over 5 Years | 2% of Donation ($2,000 or less) |
| Donor A | $15,000 | $2,000 |
| Donor B | $5,000 | $2,000 |
| Donor C | $1,000 | $1,000 |
| Donor D | $3,000 | $2,000 |
| Foundation C | $35,000 | $2,000 |
| Donor E | $7,000 | $2,000 |
| Donor F | $500 | $500 |
Remember, the entire amount of Charity B and Grant Z’s donations are considered public support in this example.
Step 5: Add
Add the 2% Amount Pulled from Each Donor (the right column from Step 4) with the donations from qualifying public charities and government grants (in this case, Charity B and Grant Z).
Example:
| Name | Amount |
| Donor B | $2,000 |
| Grant Z | $25,000 |
| Donor A | $2,000 |
| Donor C | $1,000 |
| Donor D | $2,000 |
| Foundation C | $2,000 |
| Donor E | $2,000 |
| Charity B | $8,500 |
| Donor F | $500 |
| Total | $45,000 |
Step 6: Divide
Write a fraction with the numerator (top number) being the amount you calculated in step 5. The denominator (bottom number) of your fraction will be your total support for the 5-year period (the number you calculated in Step 1). Next, divide your numerator by your denominator.
Example: $45,000 ÷ $100,000 = 0.45 or 45%
The percentage you obtain as your final answer must be 33.3% or higher to pass the test.
Our example charity passes the public support test for 501c3 organizations easily. Keep in mind, there is no benefit to passing the test by a high percentage. If you do not pass the test, your organization could be reclassified as a private foundation, subject to the rules and regulations for private foundations.
Ways to Pass the Public Support Test for 501c3 Nonprofits
Collecting donations from a wide variety of sources is a great way to improve your organization’s shot at passing the public support test for 501c3s.
Small, grassroots organizations often pass the public support test by raising small dollar donations from plenty of donors by using things like crowdfunding campaigns or social media giving. Nonprofits that provide social services like foster care and adoption often pass the public support test through accepting government grants or grants from other public charities. Nonprofits with members should note that membership fees also count as public support for the purpose of this test.
Organizations that bring in a solid percentage of their funding through program service revenue often find that is helpful in passing the public support test for 501c3s. Program service revenue includes things like an adoption fee for adopting a dog from an animal rescue, to paying an entry fee for a youth sports program. We cover program service revenue more in depth here.
There are many combinations of funding sources that can count as passing the public support test permissibility. If your nonprofit would like advice on the public support test, UBIT, or other tax exempt topics, please reach out to us for a consultation.
