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Why Is the Public Support Test Important?

TechSoup's General Counsel answers your nonprofit legal questions

At TechSoup, we are proud to have a legal team with a variety of backgrounds and areas of expertise who are able to work across our programs and departments to support the broad range of work we do.

In this series, we hope to shed light on basic concepts in nonprofit law as well as thorny legal issues that arise in the sector. This installment explains the import of the public support test that applies to the majority of 501(c)(3) public charities in the U.S.

drawing of a woman using a laptop with symbols of support

Q: What is the "public support test"?

A: The public support test is a mathematical equation that the IRS requires most public charities to meet in order to maintain their tax-exempt status. The equation is intended to ensure that a charity's income includes a diverse set of donors or payors for charitable services. With this diversity in revenue, it is assumed that the charity will remain responsive and accountable to the public.

The public support test is one of three primary ways that an organization might qualify as a public charity as opposed to a private foundation:

  1. It meets certain requirements based on the nature of its activities, which are considered inherently public-serving. For this reason, the following charity types do not need to meet a public support test:
    • Schools, including colleges and universities
    • Religious congregations
    • Hospitals, including medical research organizations
  2. It is a supporting organization. Supporting organizations are devoted solely to fundraising for, partnering with, or otherwise supporting tax-exempt organizations. They could support a single organization, several organizations, or a class of them. A common example of this entity type is a university foundation, which essentially functions as the university's development arm.
  3. It passes a mathematical public support test.

The public support test may be met in one of two ways:

  1. Meeting a support equation for charities that depend primarily on grants and donations (the vast majority).
  2. Meeting a support equation for charities that depend primarily on gross receipts earned from activities carried out in furtherance of their mission, such as ticket sales or contracted services. Examples are museums, zoos, symphonies, and certain research organizations.

These two ways are discussed next. For more detail on the specific calculations and rules for the public support test, visit our NGOsource program's LegalEASE blog.

Grants and Donations

The first of these two tests is known as the 509(a)(1) public support test. For an organization to pass, it must receive a minimum of one-third of its revenue from grants and donations. These can be from either or both of these sources:

  • Government or public charity grants, which are considered "public sources"
  • A combination of smaller donations from individuals, companies, and private foundations, which are considered "private sources." Only a small portion of each private-source donation counts toward an organization's total public support. Thus, diversity in the number of private donors helps an organization meet this test.

New organizations are not required to meet this test until their sixth year in operation.

Organizations that are able to meet a 10 percent threshold of public support, but not 33 1/3 percent, may still qualify. To do so, they must demonstrate that they meet a set of facts and circumstances that show that they otherwise operate like a public charity and are actively seeking diverse funding.

Gross Receipts

The second of these two tests is known as the 509(a)(2) public support test. For an organization to pass, it must receive more than one-third of its revenue from gross receipts earned from charitable programs. However, it can receive no more than one-third of its revenue from gross investment income and net unrelated business income. Organizations that qualify under this test must have a large number of small payors for services, regardless of their entity type.


Q: What happens if a charity fails the public support test?

A: An organization that is unable to meet the public support test but that is otherwise still operating as a 501(c)(3) charitable organization will automatically become a private foundation. In the future, if it wants to reclaim its public charity status, it will be required to demonstrate that it meets one of the applicable public charity tests for a continuous 60-month period.

In practice, however, an organization must fail the public support test two years in a row before it will revert to private foundation status. This is because an organization's public support, under either test, is measured over a five-year rolling computation period. This period consists of the current year and the four years immediately preceding it (assuming that it has completed its first five years in existence).

An organization that meets the public support test for a fiscal year is treated as a publicly supported charity for that year and the succeeding year, regardless of its actual support for the succeeding year. For example, if an organization meets the public support test for the 2020 fiscal year, it is classified as a public charity for the 2020 and 2021 fiscal years.

Q: What does it mean to be tipped into private foundation status?

A: "Tipping" occurs when a grant by a single private source — meaning an individual, business, or private foundation, and not a public charity or government — is large enough to bring the percentage of a charity's public support below the required minimum threshold. In other words, a well-meaning foundation making a significant grant to a small charity that has few other donors can actually lead to "too much of a good thing" if it causes the charity to lose its public charity status.

Although an organization cannot entirely control its public support, there are steps it can take to help prevent tipping. For example, an organization can

  • Actively seek donations from public sources, meaning other U.S. public charities, foreign public charity equivalents, and government agencies, which count in full toward an organization's public support calculation.
  • Seek to diversify funding sources by attracting donations, either from the general public through fundraisers or online donation mechanisms or from other grantmakers.
  • Consider whether a payment may be more properly classified as gross receipts for mission-related activities. For example, see if a grant may actually be properly restructured as a payment for specific services rendered. Gross receipts from mission-related activities are removed from both the numerator and the denominator of the public support calculation.
  • Determine whether a single large grant or bequest might qualify as an unusual grant and thus not count toward either the numerator or the denominator of the public support calculation.

Grantmakers should also try to avoid tipping their grantees, as doing so complicates a grantmaker's freedom to make unrestricted grants. Here are a few tips for grantmakers wishing to avoid this problem:

  • Collaborate with other grantmakers to diversify funding.
  • Advise the grantee on ways to seek additional sources of income.
  • Work with the grantee to determine whether separate installments of the grant over time may help shift the funds from all falling within a single five-year period.
  • Consider whether a payment may be more properly classified as gross receipts for mission-related activities. For example, see if a grant may actually be restructured as a payment for specific services rendered.

For more detail on tipping into private foundation status, visit our NGOsource program's LegalEASE blog.

This article is for general informational purposes only and does not represent legal advice as to any particular set of facts. Please seek legal counsel as you deem necessary.

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