The Public Support Test - Explained
Posted on Wednesday, October 12, 2022
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The public support test is very important to public charities. However, the calculation is complicated and can be difficult to understand. As a board member or management of a nonprofit, you don’t need to be an expert on the calculation but you should have a basic understanding.
Public Charity Versus Private Foundation
When an organization receives its tax-exempt status from the IRS, it is classified as either a public charity or a private foundation. A public charity has a broad base of support while a private foundation has very limited sources of support.
For example, the Foellinger Foundation in Fort Wayne is a private foundation because its funding comes from gifts from Helene Foellinger, Helene and Esther Foellinger’s estates, and contributions from The News Publishing Company. Big Brothers Big Sisters is a public charity because it receives donations from many different individuals, companies, foundations, nonprofits, and government entities.
The classification between a public charity and a private foundation is important because different tax rules apply to each. Deductibility of contributions to a private foundation is more limited than deductibility of contributions to a public charity; and private foundations are subject to excise taxes while public charities are not. Once a nonprofit is considered a public charity, it is important that it maintains its public charity status. Public charities do not normally want to become private foundations.
The Test
Each year when a public charity files its Form 990 with the IRS, it also files Schedule A with the 990 to determine if it has maintained its public charity status (if it continues to receive a broad base of support). A calculation is done based on the current year and the prior 4 years’ activity to determine if at least one-third of its support during this 5-year period has come from the public. If the calculation results in 33 1/3% or higher, the organization is considered to be a public charity for the current year and the subsequent tax year. If the calculation results in a percentage of less than 33 1/3%, then the organization has failed the test for the current year. If the organization fails the test in the current year but met the test in the prior year then it is still considered a public charity in the current year because it can rely on the prior year’s results to be considered a public charity. If an organization fails to qualify as a public charity for 2 consecutive years, it is automatically converted to a private foundation and must file Form 990-PF instead of Form 990 and pay excise taxes. Again, most public charities do not want to be converted to private foundations.
For example, ABC Organization’s public support test resulted in 42% on the 2020 Schedule A calculation. It is therefore considered a public charity for 2020 and 2021. ABC Organization’s public support test resulted in 30% on the 2021 Schedule A. Even though it did not meet the 33 1/3% requirement for 2021 because it met it in 2020, it is still considered a public charity for 2021. If the 2022 Schedule A public support test results in less than 33 1/3%, ABC Organization will no longer be considered a public charity and will be considered a private foundation. It will need to file Form 990-PF and pay any required excise taxes in 2023.
The Calculation
Public Support / Total Support = 33 1/3% or greater
There are 2 different public support calculations on Schedule A; however, both must result in the 33 1/3% as discussed above. The type of organization determines which calculation is completed. The type of organization can be found on an organization’s IRS Determination Letter, the letter received from the IRS when it received its initial exemption.
An organization will complete one of the following calculations, Part II or Part III.
Part II Calculation
The following organizations must complete the calculation in Part II.
An organization operated for the benefit of a college or university owned or operated by a government unit
An organization that normally receives a substantial part of its support from a governmental unit or from the general public
A community trust
Under this test public support is defined as gifts, grants, and contributions.*
Total support includes revenues other than payments for services.
If the calculation results in a percentage less than 33 1/3% under this test, the organization may still meet the public support test if the percentage is 10% and certain circumstances are met under the facts and circumstances test.
Part III Calculation
The following organizations must complete the calculation in Part III.
An organization that normally receives (1) more than 33 1/3% of its support from contributions, membership fees, and gross receipts from activities related to its exempt function and (2) no more than 33 1/3% of its support from gross investments income and unrelated business taxable income
Under this test public support is defined as contributions, membership fees, and gross receipts from related activities.*
Total support includes all revenue sources.
The facts and circumstances test is not available under this calculation.
*Under both calculations there are caps on the amount of contributions included from certain donors.
What You Need to Know
As a public charity, you should know where your support is coming from. To maintain public charity status, it is important to receive support from lots of different sources as opposed to one or limited sources. Large grants from private foundations, individuals, or corporations can easily upset the public support ratio, causing a loss of public charity status. Also be aware of your organization’s percentage on Schedule A. Continual decreases in the percentage could be cause for concern.
Contributed by: Carrie Minnich, MAcct, CPA | Partner | DWD CPAs & Advisors
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.