Summer 2025

Nonprofit organizations play a crucial role in the social and economic well-being of communities throughout the United States. And for these efforts the federal government gives them a tax break so they can better serve their mission. For nonprofit organizations to enjoy tax-exempt status under Section 501(c)(3) of the Internal Revenue Code (IRC), these organizations must adhere to certain requirements and regulations. One such requirement is the public support test.

All 501(c)(3) organizations are automatically deemed private foundations (taxable) unless they can meet the annual public support test. This test measures the amount of public support over a five-year period and is used by the IRS to determine whether a 501(c)(3) organization qualifies as a public charity rather than a private foundation. If not carefully monitored, nonprofits risk losing their public charity status if they fail this test. 

Tax-exempt organizations must file an annual Form 990 with the IRS to provide the agency with the information required by IRC Section 6033.¹ Generally speaking, nonprofits include churches, educational organizations such as schools, hospitals, governmental units, and publicly supported organizations. There are two types of public support tests used by 501(c)(3) organizations. Depending on how they receive their revenue, these charitable organizations would fall under Section 509(a)(1) or 509(a)(2) classifications. Organizations categorized as 509(a)(1) complete Form 990’s Schedule A, Part II, and those categorized as 509(a)(2) complete Part III of Schedule A. Both tests measure public support over a five-year period.

The 509(a)(1) Test

The 509(a)(1) public support test applies to organizations described in Section 170(b)(1)(A)(vi). These organizations are charities that normally receive a substantial part of their support from governmental units and/or from the general public. For an organization to qualify as a publicly supported organization under Section 170(b)(1)(A)(vi), it must meet one of the two following benchmarks:

• 33⅓% or more of its total support must come from governmental units, contributions from the general public, and contributions or grants from other public charities; or
• 10% or more of its total support must come from governmental units, contributions from the general public, and contributions or grants from other public charities, and the facts and circumstances must indicate it is a publicly supported organization.

Total support generally includes all of the organization’s revenue, excluding gross receipts from admissions, sales of merchandise, or other business activities related to a charity’s exempt purpose. It also generally includes the value of governmental services rendered without charge. Public support includes grants from government agencies, grants from public charities, and gifts from the general public to the extent that the gift does not exceed 2% of the organization’s total support. It is important to remember that grants and contributions from public charities and governmental sources are not subject to the 2% limitation. When using the 2% limitation, any amounts from certain related family members and from businesses and their major owners are treated as coming from one source. For example, a husband and wife would be treated as one person for purposes of the 2% limitation.

Once the organization has determined the amount of public support and the total support, they can compute the public support percentage. Using public support as the numerator and the total support as the denominator, we can determine the public support percentage:

Public Support ÷ Total Support = Public Support Percentage

For example, if Charity ABC has a total five-year support of $1 million, then any contributions from a person that exceeds 2% of $1 million (or $20,000) over the five-year period, only $20,000 is included as public support. Any amount exceeding $20,000 is not included in public support. Looking over a period of five years, the $1 million total support must have at least $333,000 (33% of revenues) come from donors who contributed less than $20,000 each (2% of revenues).

10% Facts and Circumstances Test – When organizations under Section 509(a)(1) fail to meet the 33⅓% test but still receive more than 10% of their support from the general public, they may still qualify as a public charity if they can establish that they normally receive a substantial part of their support from the general public. This must be further disclosed in Part VI of Form 990’s Schedule A. The requirements to pass the test are detailed in Treasury Regulation 1.170A-9(f)(3). The organization must go one step further and demonstrate that it satisfies some or all of the following:

• Percentage of Financial Support – The closer the percentage is to 33⅓%, the lesser will be the burden of satisfying the other factors.
• Representative Governing Body – This includes looking at whether the organization’s governing body represents the broad interest of the public rather than the private interests of a small number of persons. Such a governing body could include members who are public officials, people appointed by public officials, community leaders, people having special knowledge or expertise in the field related to the organization, or people elected by a broadly-based membership (if it is a membership organization).
• Sources of Support – The organization must demonstrate that it has a wide range of donors or a representative number of people, rather than a single or limited source. When determining what constitutes a “representative number of persons,” factors such as the type of organization, how long it has been established, and whether its activities are confined to a specific community, region, or a specialized area of interest appealing to a limited audience will be considered.
• Availability of Public Facilities or Services and Public Participation – If the organization provides facilities or services directly for the benefit of the general public on a continuous basis, it will more than likely be considered publicly supported. The regulations cite examples such as libraries and museums accessible to the public, symphony orchestras that hold public performances, and nursing homes offering bed care and medical services to the public.
• Additional Factors for Membership Organizations – Other criteria can be used by membership organizations.

The 10% facts and circumstances test offers a lifeline to many nonprofits that don’t meet the strict 33⅓% public support test. By understanding and documenting their public engagement, diverse funding sources, and community benefit, organizations can still qualify as a public charity.

The 509(a)(2) Test

This test applies to organizations described as falling under Section 509(a)(2). A Section 509(a)(2) public charity is one that receives substantial revenues from a combination of contributions, membership fees, and gross receipts from activities that further its exempt purpose. For an organization to qualify as a publicly supported organization under Section 509(a)(2), it must meet both of the following requirements:

• More than 33⅓% of its support normally must come from gifts, grants, contributions, membership fees, and gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities in an activity that isn’t an unrelated trade or business under Section 513; and
• No more than 33⅓% of its support normally must come from gross investment income and net unrelated business income.

Total support includes the organization’s revenue, such as gifts, grants, investment income, membership fees, etc. Gross receipts from admissions, sales of merchandise, or other business activities related to a charity’s exempt purpose are included in the calculation of total support. Gross investment income includes income from interest, dividends, payments with respect to securities loans, rents, and royalties.

It is important to note that contributions from disqualified persons such as board members, substantial contributors, and certain related persons do not count as public support but are included as total support. IRC 4946, defines a disqualified person as:

• Substantial contributor: Any individual who donated to the charity an amount that exceeded the greater of $5,000 or 2% of the total contributions.
• An owner who owns more than 20% of a corporation, partnership, or trust that is a substantial contributor.
• A foundation manager: These include officers, directors, trustees, or employees with similar responsibilities.
• Family member: These include spouses, ancestors, lineal descendants, and spouses of lineal descendants of substantial contributors, foundation managers, and 20% owners. Legally adopted children are also considered lineal descendants.
• Related legal entities: If any person or entity described above owns more than 35% of the total combined voting power in the corporation (including constructive holdings); more than 35% of the profits interest in a partnership (including constructive holdings); or more than 35% of the beneficial interest in a trust or estate, it is considered related.

Once an organization determines the public support, investment income, and total support for the five-year period, what follows is the two-step test for public support and investment income:

• Step 1 –Determine whether the public support percentage is greater than 33⅓%.
  Public Support ÷ Total Support = Public Support Percentage
• Step 2 –Determine whether the investment income percentage is less than 33⅓%.
  Investment Income ÷ Total Support = Investment Income Percentage

Failed the Test, Now What?

It takes two years of failing the test for a charity to lose its public charity status. For example, if Charity ABC passes the public support test in 2023, it is considered a public charity in 2024 even if it fails the test that year. It takes two consecutive years of failing to result in reclassification to private foundation status, which would start at the beginning of the second year.

After a change in status, the organization would begin filing Form 990-PF rather than Form 990. The organization would now have to pay excise taxes on its net investment income, and there would also be a cap on the amount a donor can deduct for contributions made to a public charity as opposed to a private foundation. Private foundations are subject to more stringent regulations compared to public charities. Losing public charity status can make the organization ineligible for certain grants and funding opportunities, as many grant-making organizations fund only public charities.

If an organization fails the public support test but wants to regain its public charity status, it must take certain steps. The organization must demonstrate that it meets the requirements of either the 33⅓% support test or the 10% facts and circumstances test over a five-year period. This is done by filing Form 8940 (Request for Miscellaneous Determination) with the IRS.

Part of this demonstration includes providing a narrative explanation, financial information, and calculations showing how the organization would pass the public support test. The charity will continue to operate as a private foundation until reclassification is granted by the IRS.

More Considerations

Newly Formed Organizations – Even though the IRS provides a five-year grace period for newly formed organizations to meet the test, they must keep track of their public support. Since the public support tests are done on a five-year basis, Schedule A of a newly formed organization will not disclose the existence of a public support test until it has been in operation for more than five years. Organizations check the box on Schedule A denoting that they have been in existence for less than five years and are exempt from disclosing their public support test.

Smaller Organizations – Most small tax-exempt organizations whose annual gross receipts are normally $50,000 or less and are required to electronically submit Form 990-N (also known as the e-Postcard) are not required to file Schedule A. However, the organization should carefully monitor its public support status.

Unusual Grants – In applying the 2% limit to determine whether the one-third support test or the 10%-of-support requirement is met, an organization can exclude contributions that are considered unusual grants from both the numerator and denominator of the appropriate percent-of-support fraction. The IRS’s definition of an unusual grant is included in Sections 1.170A-9(f)(6)(ii) and 1.509(a)-3(c)(3). They are generally substantial contributions and bequests from disinterested persons who were attracted because of the organization’s publicly supported nature, are unusual and unexpected because of the amount, and are large enough to endanger the organization’s status as normally meeting either the 33⅓% public support test or the 10% facts-and-circumstances test. The organization also has the option to file Form 8940 to ask the IRS whether the grant or contribution may be excluded as an unusual grant. The issuance of the determination will be at the sole discretion of the IRS.

IRS Tax Determination Letter – Generally, IRS tax determination letters contain the IRC section under which an organization is described, such as Section 170(b)(1)(A)(vi) or Section 509(a)(2), and this would then be disclosed in Part I of Schedule A of Form 990. However, organizations are not required to select the section that is included in the letter. They can choose the section that reflects the public support test that best defines their sources of support.

Conclusion

For organizations to maintain their public charity status, understanding and applying the rules of the public support test is crucial. With careful planning, record-keeping, and a commitment to broad-based support, nonprofits will not only comply with IRS regulations but also reinforce their mission to serve the public good. Whether relying on the 33⅓% test or the 10% facts and circumstances test, nonprofits must remain vigilant in tracking their sources of support, staying informed about IRS expectations, and proactively adapting to financial shifts that could affect their status.

Navigating these rules may seem daunting, especially for smaller or newly formed organizations, but the benefits of qualifying as a public charity – such as greater donor confidence, broader funding opportunities, and fewer regulatory burdens – make the effort worthwhile. 

¹ Some nonprofit organizations are not subject to the public support test. These include schools, hospitals as described in section 170(b)(1)(A)(iii), churches, and religious organizations.

Nonprofit organizations play a crucial role in the social and economic well-being of communities throughout the United States. And for these efforts the federal government gives them a tax break so they can better serve their mission. For nonprofit organizations to enjoy tax-exempt status under Section 501(c)(3) of the Internal Revenue Code (IRC), these organizations must adhere to certain requirements and regulations. One such requirement is the public support test.

All 501(c)(3) organizations are automatically deemed private foundations (taxable) unless they can meet the annual public support test. This test measures the amount of public support over a five-year period and is used by the IRS to determine whether a 501(c)(3) organization qualifies as a public charity rather than a private foundation. If not carefully monitored, nonprofits risk losing their public charity status if they fail this test. 

Tax-exempt organizations must file an annual Form 990 with the IRS to provide the agency with the information required by IRC Section 6033.¹ Generally speaking, nonprofits include churches, educational organizations such as schools, hospitals, governmental units, and publicly supported organizations. There are two types of public support tests used by 501(c)(3) organizations. Depending on how they receive their revenue, these charitable organizations would fall under Section 509(a)(1) or 509(a)(2) classifications. Organizations categorized as 509(a)(1) complete Form 990’s Schedule A, Part II, and those categorized as 509(a)(2) complete Part III of Schedule A. Both tests measure public support over a five-year period.

The 509(a)(1) Test

The 509(a)(1) public support test applies to organizations described in Section 170(b)(1)(A)(vi). These organizations are charities that normally receive a substantial part of their support from governmental units and/or from the general public. For an organization to qualify as a publicly supported organization under Section 170(b)(1)(A)(vi), it must meet one of the two following benchmarks:

• 33⅓% or more of its total support must come from governmental units, contributions from the general public, and contributions or grants from other public charities; or
• 10% or more of its total support must come from governmental units, contributions from the general public, and contributions or grants from other public charities, and the facts and circumstances must indicate it is a publicly supported organization.

Total support generally includes all of the organization’s revenue, excluding gross receipts from admissions, sales of merchandise, or other business activities related to a charity’s exempt purpose. It also generally includes the value of governmental services rendered without charge. Public support includes grants from government agencies, grants from public charities, and gifts from the general public to the extent that the gift does not exceed 2% of the organization’s total support. It is important to remember that grants and contributions from public charities and governmental sources are not subject to the 2% limitation. When using the 2% limitation, any amounts from certain related family members and from businesses and their major owners are treated as coming from one source. For example, a husband and wife would be treated as one person for purposes of the 2% limitation.

Once the organization has determined the amount of public support and the total support, they can compute the public support percentage. Using public support as the numerator and the total support as the denominator, we can determine the public support percentage:

Public Support ÷ Total Support = Public Support Percentage

For example, if Charity ABC has a total five-year support of $1 million, then any contributions from a person that exceeds 2% of $1 million (or $20,000) over the five-year period, only $20,000 is included as public support. Any amount exceeding $20,000 is not included in public support. Looking over a period of five years, the $1 million total support must have at least $333,000 (33% of revenues) come from donors who contributed less than $20,000 each (2% of revenues).

10% Facts and Circumstances Test – When organizations under Section 509(a)(1) fail to meet the 33⅓% test but still receive more than 10% of their support from the general public, they may still qualify as a public charity if they can establish that they normally receive a substantial part of their support from the general public. This must be further disclosed in Part VI of Form 990’s Schedule A. The requirements to pass the test are detailed in Treasury Regulation 1.170A-9(f)(3). The organization must go one step further and demonstrate that it satisfies some or all of the following:

• Percentage of Financial Support – The closer the percentage is to 33⅓%, the lesser will be the burden of satisfying the other factors.
• Representative Governing Body – This includes looking at whether the organization’s governing body represents the broad interest of the public rather than the private interests of a small number of persons. Such a governing body could include members who are public officials, people appointed by public officials, community leaders, people having special knowledge or expertise in the field related to the organization, or people elected by a broadly-based membership (if it is a membership organization).
• Sources of Support – The organization must demonstrate that it has a wide range of donors or a representative number of people, rather than a single or limited source. When determining what constitutes a “representative number of persons,” factors such as the type of organization, how long it has been established, and whether its activities are confined to a specific community, region, or a specialized area of interest appealing to a limited audience will be considered.
• Availability of Public Facilities or Services and Public Participation – If the organization provides facilities or services directly for the benefit of the general public on a continuous basis, it will more than likely be considered publicly supported. The regulations cite examples such as libraries and museums accessible to the public, symphony orchestras that hold public performances, and nursing homes offering bed care and medical services to the public.
• Additional Factors for Membership Organizations – Other criteria can be used by membership organizations.

The 10% facts and circumstances test offers a lifeline to many nonprofits that don’t meet the strict 33⅓% public support test. By understanding and documenting their public engagement, diverse funding sources, and community benefit, organizations can still qualify as a public charity.

The 509(a)(2) Test

This test applies to organizations described as falling under Section 509(a)(2). A Section 509(a)(2) public charity is one that receives substantial revenues from a combination of contributions, membership fees, and gross receipts from activities that further its exempt purpose. For an organization to qualify as a publicly supported organization under Section 509(a)(2), it must meet both of the following requirements:

• More than 33⅓% of its support normally must come from gifts, grants, contributions, membership fees, and gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities in an activity that isn’t an unrelated trade or business under Section 513; and
• No more than 33⅓% of its support normally must come from gross investment income and net unrelated business income.

Total support includes the organization’s revenue, such as gifts, grants, investment income, membership fees, etc. Gross receipts from admissions, sales of merchandise, or other business activities related to a charity’s exempt purpose are included in the calculation of total support. Gross investment income includes income from interest, dividends, payments with respect to securities loans, rents, and royalties.

It is important to note that contributions from disqualified persons such as board members, substantial contributors, and certain related persons do not count as public support but are included as total support. IRC 4946, defines a disqualified person as:

• Substantial contributor: Any individual who donated to the charity an amount that exceeded the greater of $5,000 or 2% of the total contributions.
• An owner who owns more than 20% of a corporation, partnership, or trust that is a substantial contributor.
• A foundation manager: These include officers, directors, trustees, or employees with similar responsibilities.
• Family member: These include spouses, ancestors, lineal descendants, and spouses of lineal descendants of substantial contributors, foundation managers, and 20% owners. Legally adopted children are also considered lineal descendants.
• Related legal entities: If any person or entity described above owns more than 35% of the total combined voting power in the corporation (including constructive holdings); more than 35% of the profits interest in a partnership (including constructive holdings); or more than 35% of the beneficial interest in a trust or estate, it is considered related.

Once an organization determines the public support, investment income, and total support for the five-year period, what follows is the two-step test for public support and investment income:

• Step 1 –Determine whether the public support percentage is greater than 33⅓%.
  Public Support ÷ Total Support = Public Support Percentage
• Step 2 –Determine whether the investment income percentage is less than 33⅓%.
  Investment Income ÷ Total Support = Investment Income Percentage

Failed the Test, Now What?

It takes two years of failing the test for a charity to lose its public charity status. For example, if Charity ABC passes the public support test in 2023, it is considered a public charity in 2024 even if it fails the test that year. It takes two consecutive years of failing to result in reclassification to private foundation status, which would start at the beginning of the second year.

After a change in status, the organization would begin filing Form 990-PF rather than Form 990. The organization would now have to pay excise taxes on its net investment income, and there would also be a cap on the amount a donor can deduct for contributions made to a public charity as opposed to a private foundation. Private foundations are subject to more stringent regulations compared to public charities. Losing public charity status can make the organization ineligible for certain grants and funding opportunities, as many grant-making organizations fund only public charities.

If an organization fails the public support test but wants to regain its public charity status, it must take certain steps. The organization must demonstrate that it meets the requirements of either the 33⅓% support test or the 10% facts and circumstances test over a five-year period. This is done by filing Form 8940 (Request for Miscellaneous Determination) with the IRS.

Part of this demonstration includes providing a narrative explanation, financial information, and calculations showing how the organization would pass the public support test. The charity will continue to operate as a private foundation until reclassification is granted by the IRS.

More Considerations

Newly Formed Organizations – Even though the IRS provides a five-year grace period for newly formed organizations to meet the test, they must keep track of their public support. Since the public support tests are done on a five-year basis, Schedule A of a newly formed organization will not disclose the existence of a public support test until it has been in operation for more than five years. Organizations check the box on Schedule A denoting that they have been in existence for less than five years and are exempt from disclosing their public support test.

Smaller Organizations – Most small tax-exempt organizations whose annual gross receipts are normally $50,000 or less and are required to electronically submit Form 990-N (also known as the e-Postcard) are not required to file Schedule A. However, the organization should carefully monitor its public support status.

Unusual Grants – In applying the 2% limit to determine whether the one-third support test or the 10%-of-support requirement is met, an organization can exclude contributions that are considered unusual grants from both the numerator and denominator of the appropriate percent-of-support fraction. The IRS’s definition of an unusual grant is included in Sections 1.170A-9(f)(6)(ii) and 1.509(a)-3(c)(3). They are generally substantial contributions and bequests from disinterested persons who were attracted because of the organization’s publicly supported nature, are unusual and unexpected because of the amount, and are large enough to endanger the organization’s status as normally meeting either the 33⅓% public support test or the 10% facts-and-circumstances test. The organization also has the option to file Form 8940 to ask the IRS whether the grant or contribution may be excluded as an unusual grant. The issuance of the determination will be at the sole discretion of the IRS.

IRS Tax Determination Letter – Generally, IRS tax determination letters contain the IRC section under which an organization is described, such as Section 170(b)(1)(A)(vi) or Section 509(a)(2), and this would then be disclosed in Part I of Schedule A of Form 990. However, organizations are not required to select the section that is included in the letter. They can choose the section that reflects the public support test that best defines their sources of support.

Conclusion

For organizations to maintain their public charity status, understanding and applying the rules of the public support test is crucial. With careful planning, record-keeping, and a commitment to broad-based support, nonprofits will not only comply with IRS regulations but also reinforce their mission to serve the public good. Whether relying on the 33⅓% test or the 10% facts and circumstances test, nonprofits must remain vigilant in tracking their sources of support, staying informed about IRS expectations, and proactively adapting to financial shifts that could affect their status.

Navigating these rules may seem daunting, especially for smaller or newly formed organizations, but the benefits of qualifying as a public charity – such as greater donor confidence, broader funding opportunities, and fewer regulatory burdens – make the effort worthwhile. 

¹ Some nonprofit organizations are not subject to the public support test. These include schools, hospitals as described in section 170(b)(1)(A)(iii), churches, and religious organizations.