Public Support Test

Posted on Wednesday, March 23, 2016

501(c)(3) tax exempt organizations are considered either private foundations or public charities.  Private foundations are subject to other rules and regulations as well as excise taxes.  Every organization that qualifies for 501(c)(3) tax exemption is considered a private foundation unless it falls into one of the four basic categories of exclusions under Section 509(a)(1), 509(a)(2), 509(a)(3) and 509(a)(4).  Generally if the organization has broad public support or actively functions in a supporting relationship to those organizations, it meets the exclusion. 

Publicly supported organizations must describe the sources of their revenue (capital gains are excluded) on Schedule A of Form 990 to determine if they meet the applicable public support test.  The support test is computed using a five-year period, the current year and previous four years.  If the organization meets the support test, it is deemed publicly supported for the current year and the immediately following tax year.  If the organization fails to qualify as publicly supported for two consecutive years, it must file as a private foundation on Form 990-PF instead of Form 990 and pay excise tax on its net investment income. 

Support Test for Section 170(b)(1)(A)(iv) and 170(b)(1)(A)(vi) Organizations

Organizations that normally receive a substantial part of their support from a governmental unit or from the general public, organizations operated for the benefit of a college or university owned or operated by a government unit, or community trusts must complete the support test in Part II of Schedule A.  The organization’s public support for the five year period divided by its total support for the same period must equal at least one-third.  

Public support includes gifts, grants, contributions and membership fees received, tax revenues levied for the organization’s benefit, and the value of services or facilities furnished by a governmental unit without charge.  Total contributions from one donor for the five year period are included in public support only up to 2% of total support.  The amount in excess of 2% is deducted in calculating total public support.   The 2% limitation does not apply to governmental units or other publicly supported organizations.

Total support includes the amounts included in the public support total (excluding the 2% limitation) plus gross income from interest, dividends and rent, net income from unrelated business income and other income. 

If the organization fails to meet the one-third support test, there is a facts and circumstances test that it may meet to be treated as a publicly supported organizations.  To qualify, 10% or more of its total support must come from governmental agencies, contributions from the general public and  contributions or grants from other public charities and the facts and circumstances indicate it is a publicly supported organization.

Support Test for Section 509(a)(2) Organizations

Organizations that normally receive more than one-third of their support from contributions, membership fees, and gross receipts from activities related to their exempt functions and no more than one-third of their support from gross investment income and unrelated business taxable income must complete the support test in Part III of Schedule A.  Similar to the support test in Part II, the organization’s public support for the five year period divided by its total support for the same period must equal at least one-third.  In addition, its total investment income plus unrelated business taxable income total divided by its total support for the five year period cannot be more than one-third.

Public support includes the same items included in public support for Part II plus gross receipts from admissions, merchandise sold or services performed related to the organization’s tax exempt purpose.    Contributions from disqualified persons and contributors who have given more than the greater of $5,000 or 1% of total support are deducted in calculating total public support. 

Total support includes the amounts included in the public support total for Part III (excluding the limitations) plus gross income from interest, dividends and rent, net income from unrelated business income and other income. 

Unlike the support test in Part II, there is no facts and circumstances test for Part III.

Posted by: Carrie Minnich, CPA

Posted in Mission Minded Nonprofits

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

"During the later months of 2015, our program found ourselves upside down due to several problems and in need of a change.  We needed to find a professional CPA Business who could help us get…"

Kevin Pauley, Treasurer

Grant Co. Sheriff's Dept. Chaplaincy Program