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Understanding the 501(c)(3) Public Support Test

Over the course of our many years in business, we have found the public support test to be among the least understood topics by nonprofits, especially smaller organizations.  But, it is absolutely critical to understand how it works, lest your nonprofit lose its public charity status.

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Before we get into the specifics of the public support test itself, it’s helpful to step back a bit and talk about a subject we’ve covered before, namely, private foundations vs. public charities.  Both organizational types are considered tax-exempt 501(c)(3) nonprofits, but the requirements regarding donor support are quite different.  Private foundations are typically closely-governed nonprofits, and the purpose of most private foundations is to fund the work of public charities.  In addition to being allowed to have close control, private foundations also can be closely funded, even by just one individual.  Many family foundations are governed and funded by members of a single family.

Public charities, on the other hand, the preferred organizational choice of most 501(c)(3)s, are expected to have both diverse control and diverse funding.  On the control side, the IRS expects charity boards to have a majority of members who are unrelated by blood, marriage, and outside business ownership.  As for funding sources, charities are required to have a broad base of public support, which is where the public support test comes in.

Calculating the Public Support Test

The simplest definition of the IRS public support test states that at least 1/3 (33.3%) of donations must be given by donors who give less than 2% of the nonprofit’s overall receipts.  Exceptions include any gifts received from other donative public charities and/or a government source, such as a state or federal grant.  For organizations that also get funds from sales of goods or services (this is called program revenue), such revenue counts toward the public support test also.

As you can expect with IRS compliance issues, however, it’s much more complicated than it appears.  There are several subcategories of 501(c)(3) public charities, including 509(a)(1), 509(a)(2), 509(a)(3), and 509(a)(4).  We’ll focus primarily on 509(a)(1) and (a)(2).  When an organization first requests 501(c)(3) determination from the IRS, the Form 1023 application asks which subcategory the nonprofit is seeking status under, based on its purpose, programs, and revenue sources.  509(a)(1) status has several sub-subcategories, some of which are self-defining by the organization’s purpose:  church (170(b)(1)(A)(i)), school (170(b)(1)(A)(ii)), hospital (170(b)(1)(A)(iii)).  Others falling into 509(a)(1) are more generically defined by source of revenue (donations and grants), assuming their purpose doesn’t fit a predefined category.  They are considered 509(a)(1)/170(b)(1)(A)(vi).

509(a)(2) are those charities that are not slotted into 509(a)(1) status by virtue of purpose, plus have a mix of donor support and program revenue.

At this point, you may be getting lost in the weeds.  But stick with us…the public support test is calculated differently on Form 990, Schedule A, depending on 509(a)(1) or 509(a)(2) status, and source of revenue.

Let’s consider some examples:

ABC CHARITY, INC. – Scenario 1:

ABC Charity is a 509(a)(1) public charity that receives substantially all of its support from donations from individuals, families, and businesses.  Here’s how the numbers break out.  Assuming the organization brought in exactly $1,000,000 in cumulative donations over the past 6 years, at least $333,000 must have come from donors giving less than $20,000 each (cumulatively) in order to pass the public support test.  Here’s how their numbers broke out:

Total donor support:  $1,000,000

Total support under 2% (< $20,000):  $882,000

Total support above 2% (>=$20,000):  $118,000

Public support percentage:  88.2%


ABC CHARITY, INC. – Scenario 2:

Instead of individual support only, let’s say ABC Charity also received donations from several other public charities.  How does that affect the calculation?

Total donor support:  $1,000,000

Support from public charities:  $425,000

Individual support under 2%:  $115,000

Individual support over 2%:  $465,000

In this case, the public support test is a little more complicated.  Donations received from other public charities is often considered public support, regardless of amount, but not always.  For the most part, the donating charity needs to be a 509(a)(1)/170(b)(1)(A)(vi) organization or a church.  Schools, for example, are 509(a)(1) nonprofits, but donations above 2% do not count as public support.

Assuming the $425,000 above is from other 170(b)(1)(A)(vi) organizations, the calculation on this one is $425,000 + $115,000 = $535,000, for a resulting 53.5% public support.  If not, the $425,000 would have to be further broken out and part of it moved into the “over 2%” column.


XYZ NONPROFIT, INC. – Scenario 1:

XYZ Nonprofit’s situation is different from ABC’s.  While XYZ, a children’s dance school, does gladly accept donations, it also receives part of its revenue from participation fees and from selling tickets to its performances.  As such, it is sub-classified as a 509(a)(2).  Let’s see how their numbers work:

Total revenue:  $1,000,000

Participation fees (program revenue):  $760,000

Ticket sales (program revenue):  $80,000

Individual support under 2%:  $60,000

Individual support over 2%:  $100,000

XYZ’s resulting public support percentage is 90% ($760,000 + $80,000 + $60,000 = $900,000).

There are many more scenarios we could present, but this sample gives you an idea of how complex this can be.  We need to additionally point out that the public support test is calculated on a 5-year cumulative basis, not any individual year.  In addition, the IRS does not require new public charities to demonstrate public support until year 6.

Failing to Pass the Public Support Test

Failure to pass the public support test is a serious matter that will result in your nonprofit having its public charity status reverted to that of a private foundation.  For many nonprofits, that could be a potentially devastating outcome.  Private foundation status is ideal for those organizations that specifically need that structure.  For charities that find themselves downgraded, however, the consequences include having to file Form 990-PF each year, regardless of income, plus the addition of excise taxes not charged to public charities.  Even worse, the organization cannot regain public charity status for at least 5 forward years.

In reality, reverting to private foundation status takes two years of failing the public support test.  Why?  According to the IRS, passing the public support test in any given year automatically carries forward to the following year.  For example, if a charity passes the public support test in 2020, tax year 2021 will automatically considered a public charity year, even if it fails the public support test when filing the 2021 Form 990.  However, failing two years in a row will result in private foundation status starting as of the beginning of the second year.

An additional area of concern is those organizations that receive advance public charity status from the IRS, but fail the public support test in year 6 (the first year the calculation is due) and do not qualify under the Facts and Circumstances test.  What then?  Were they ever really a public charity.  The answer is no, not really.  Since the IRS doesn’t evaluate the first five years, private foundation status isn’t retroactive to the beginning of the organization’s existence, but it will start as of year 6, not the subsequent year as in the example above.

The Facts and Circumstances Test - A Rescue for Failure?

Even if your nonprofit fails the public support test, it may still be possible to retain public charity status, so long as your public support is at least 10%.  When that happens, charities must fall back on what’s called the facts and circumstances test.  It’s a subjective request to the IRS on Form 990, Schedule A to allow the organization to retain charity status.  The organization must assert that it is operating as a charity, not a foundation, and that they are actively working to get their public support percentage back up to 33% or more.  There’s no guarantee that the IRS will grant the request, but typically they do if the situation seems reasonable.

It is entirely possible to fall into this situation multiple years in a row.  It is certainly a risk, as this is a subjective IRS decision.  But, we have seen nonprofits take 2 or more years to get back above water and still retain status.  Should your public support test drop below 10%, however, and your nonprofit WILL be downgraded.

Wrapping Up

The public support test is critically important.  Understand how it works, keep great records, and work hard to ensure your charity has at least 33% public support.  And, don’t go it alone.  Trust Foundation Group to assist by taking advantage of our Assurance membership or a-la-carte Form 990 services.

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Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

This Post Has 28 Comments

  1. Hi Greg, thanks for your helpful article. My foundation, founded 12/13/11, is a 501(c)3 non-profit (170 (b) (1) (A) (vi)) that funds the rescue and rehabilitation of child slaves in Ghana. We are an all volunteer organization so no one receives a salary. We receive donations from the public and one Rotary Club grant. Our two largest individual donors make donations through the CAF American Donor Fund and Fidelity Charitable, both donor advised funds. I have been doing research on the 1/3 public support test to make sure that at least 1/3 of our donations are given by donors who give less than 2% of our total receipts. Among the three scenarios your article mentions, my foundation most closely resemble Scenario 2 because the majority of our donations comes from individuals except for a local Rotary Club’s grant. While I believe the Rotary Club grant would be considered public support, would donations from the CAF and Fidelity Charitable also be considered public support even though they are coming from an individual/family’s account? I tend to doubt it.

    My concern is that my husband and my personal donation to the foundation, plus the donations from our largest donors (not family members or board members), that are over 2% of total donations, are close to 2/3 of total donations. So despite my foundation being a public charity where all our donations come from many individuals, with the exception of the single Rotary grant, we risk breaching the public support test because of the 2% of total receipts rule. You also said the public support test is calculated on a 5-year cumulative basis. Could you please explain what that means and how that is calculated? Thank you!

    1. Hi, Lori. Sorry for the delay in a response. We get bombarded with hundreds of questions and can only answer a few. For what it’s worth, we’re using your question in an upcoming Q&A segment on our YouTube channel. You’ll want to check it out when it goes live in late October. Short answer: you’re probably fine. DAF sponsors are public charities themselves, and the donation to your charity is considered to have come from them, not the donor who set up the account. Watch the video for more details!

  2. We are a small non-profit, revenues less than $50,000 by a long shot. We file 990-N forms. Do we need to pass the 33 1/3% test? Thanks.

    1. Hey, Jim. Sorry for the time gap. Short answer: yes, you do. Common question we get, but amount of revenue doesn’t impact the requirement to pass the PST. We’re going to use your question in an upcoming Q&A video on our YouTube channel so it can help others. Should go live in late October, so check it out.

  3. We have a single corporate donor who provides us with very substantial in-kind goods and services pro bono. Are in-kind donations considered in the public support test? Or are only cash contributions considered?

    Program revenue: $1,000,000
    Estimate of in-kind goods, IP and services donated by Company X (no cash): $2,500,000
    Support under 2%: $250,000


    1. Hi, Bronwyn. Like I said to some other question-askers, so sorry for the delay. We got bombarded with questions and can only answer a few. However, yours is great and we have included it in an upcoming video on our YouTube channel. That will go live sometime in late October or early November. To your question: pro bono services are NOT considered a tax-deductible contribution, so there’s some good news. The bad news is that in-kind goods are in the calculation at fair market value. If you back out service gifts, you may be OK here. I’d say you can probably back out pro bono IP usage, too, as that is not tax-deductible to the donor either.

  4. Hello Greg,

    I am new to the nonprofit world. I applied for a EIN number and filed my 1023 EZ form. I am still waiting for my exemption status letter. Can I still take donations before I receive the letter from the IRS?

    Also, my oldest son landed a job making very good money. He has been donating every week. Will this be a problem with the IRS since he is family? Is there only a limit I can receive from a ‘person of interest or family member?’ Also, do I have to match his donations with community support? Thank you!

    1. Good questions. Depending on which state is home base for you, you probably need to get registered for charitable solicitations before seeking donor support. If someone volunteers a donation, their gift should be retroactively tax deductible when your 501(c)(3) status is approved. If it’s not approved, then obviously they won’t be. There’s no limit to what your son can give because of the relationship. However, over time you will need to diversify your funding sources (see the article above).

  5. Our 10 year old 501c3 is evolving from being exclusively funded through donations to generating mission-related revenue through the sale of products and services resulting in us failing the 1/3 public support test this year. If we change our subclassification from 509(a)(1) to 509(a)(2) to allow product revenue to be included in the public support test, a) can this be made retroactive to previous tax years and b) is there any new reporting or other issues we should consider before changing our subclassification?

    Many thanks.

    1. Great question. If you complete page 2 of Form 990 Schedule A, you are indicating a change from 509(a)(1) to (a)(2). The spreadsheet will allow you capture prior years with program revenue included, which should solve your problem. There’s not much else to consider, as the IRS doesn’t really care which one you are, as long as it accurately describes your current situation.

  6. We are a Sportsman Council, can we use grants from the NRA to cover our 33 per cent for public support? This is our only income.

    1. No, probably not. The NRA, at least the main organization everyone is familiar with, is a 501(c)(4), not a 501(c)(3). It’s still a nonprofit, but not a charitable one, so grants received from it are not considered public support. If you’re talking about the NRA’s charitable foundation, which is a 501(c)(3), then it depends. If it is a public charity like yours, then any grants received are considered public support. If it is anything else, such as a private foundation, then the grant isn’t public support. You may need to find other public funding sources to cover your 33%.

  7. Our 501c3 has been operating for over 20 years. We provide scholarships to seniors going to college. Thru the years we have fortunately been able to grow an endowment fund substantially. Because of the income generated we are in danger of falling below the 33% mark within the next 3-5 years. Once we fall below it will be very difficult to bring it back above 33%. I see us being in the 25-30% range annually. Will this be a problem? We do all kinds of community fundraising including payroll deductions for school employees, mailing list of over 300 community members, annual golf tournament. Still don’t see us getting over 33% due to the endowment income.
    One other question is when we get to the point where we are under 33% and we check the 10% facts and circumstances box and explain in section VI how will we know if they accepted our charity as a 501c3. Do they notify you? Or “no news is good news”.

    1. Sorry for the delay in responding, Michael. These are very real issues you are asking about. The public support test, as the article indicates, is based on a running 5 year average. I don’t know if your 3-5 year time frame is based on your average, or a given year. Either way, it sounds inevitable. The first solution is always to raise more public support, but if you cannot get it up to 33%, well that’s a problem. My guess is, if you’re at least 25%, the IRS will grant you a waiver based on facts and circumstances. You will still be way above the 10% minimum, and there’s no limit to the number of years you can request such an allowance. If they grant the waiver, you will be notified by mail…eventually. Should they choose to not grant the waiver, they will reclassify your nonprofit as a private foundation. That may not be a problem, given that you are primarily a scholarship-granting entity. Hopefully, though, you can avoid that outcome.

  8. Hi Mr.McRay,
    My friend and I are in the process of starting a nonprofit for Disability Youth Sports League. We have become overwhelmed with filling the traditional 501 C3. We just found out about the 1023 EZ and curious if this could be something that benefits us. Questions we like the answers to are.
    1. We don’t think we will exceed the $50,000 Revenue limit on it but is it looked upon negatively by the IRS?
    2. What is the definition of Revenue in a non-profit situation? I.E. money left over from the fiscal year or money that was brought in by donations.
    Scenario being
    We magically have a donor or multiple donations equaling up to a $100,000 for the year. If we allocate the donations to all the nonprofit expenses like equipment, field rentals, and salary. Leaving the nonprofit with less than $50,000 or even $0 at the end of the fiscal year. Do we need to change our 509c 3 status?

    Thank you Karl

    1. Hi, Karl. This answer may be too late to help, so I apologize that we missed this earlier. Here’s the answer anyway:

      If you otherwise qualify to use Form 1023-EZ, and you reasonably believe you will have less than $50,000 in gross income each of the first three years, then you should be OK to apply for 501c3 status on that form. If you happen to go over in any given year, there is no penalty for that. It sounds like, from your questions, that you’re under the impression that the $50k limit is based on net income or profit…that’s wrong. It’s based on GROSS receipts, meaning all of what you receive in a year without regard for what you spent. If your nonprofit receives $80,000 this year, and spends $75,000 of it, you still received $80,000 in gross income. That’s what the limit is based on. That being the case, you probably should not use Form 1023-EZ.

      We just posted a new article on 6/4/19 about Form 1023-EZ. Check it out!

  9. Thank you – very informative Greg!

    A quick question – I assume that Friends Of organizations from foreign charities also have to abide by the public support test, as well as those that are formed through a fiscal sponsor?


    1. Yes, they do, assuming they are public charities. But, you raise interesting examples. With a “Friends Of” group, in order qualify as a 501c3, it must be completely functionally independent of the foreign charity is supports. And, the public support test applies. With regard to fiscal sponsors, most are public charities, too. In that case, any pass-thru donations are automatically considered public support.

  10. Hi, I am a board member on a 501c3 nonprofit and would like to donate a property that I own to the nonprofit which is in a different state so that the nonprofit could sell it and purchase a much needed property to operate out of. Would it be best for myself and the nonprofit to directly donate the property in this way or should I sell the property first and then donate the funds I receive from the sale?

    1. There is often a benefit for directly donating property to a charity, instead of selling it and donating the proceeds. Usually, a donor can write off the real property donation at fair market value and avoid capital gains taxes at the same time. As with anything that involves your taxes, please consult with your own tax CPA with regard to personal tax consequences in your particular situation.

  11. Our athletic boosters club has had a carry over of $20k the last few years. What is the rule of thumb.. and how much athletic support should we be giving per year?

    1. Hi, Michelle. There’s really no hard and fast rule about that. As long as the booster club is fulfilling it’s purpose and benefiting the supported athletic activities (and not just hoarding money), there’s nothing inherently wrong about have left-over budget to carry into the next year. That sounds like good fiscal stewardship. It’s about balance. I think most people would expect a majority of a booster club’s annual revenue to be spent “boosting”. But donors also appreciate good planning. I hope that helps.

  12. Hi,
    A friend of mine from Ohio had a non profit for many years providing housing, food, clothing, addiction counseling, etc. Upon moving to PA he realized he could not transfer his organization from to PA and wants to find out how to go about starting up a new 501c3 in Luzerne County, PA and what the costs would be, what papers need to be filled out, where do they need to be sent,…. etc. Since I offered to help him with this, you can respond back to this email with any helpful information or answers to my questions.
    Thank you,

    1. Hi, Debbie. Sorry for the delay in responding. Your question is best answered by our Sales Advisors. Give us a call and we can chat about what your friend’s situation is, and how our services can best match their situation. We look forward to hearing from you.

  13. Hi,
    If a non-profit of a scholos PTA is revoked, can we still accept donations? Can we accept small (less than $50) donations with the disclaimer that it is not tax deductible. We are waiting for status update. Our bank account total is less than $500 at the moment

    1. Hi Sandra, yes, you can still accept donations as long as you disclose that the donations are not tax deductible.

  14. Thank you for your monthly Webster, it is so helpful for we are a newly started Foundation helping the community in ways of housing, feeding, transportation, and cloths to the less fortunate.
    Thanks again…
    We are working on building a website.

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