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Passing the IRS Public Support Test



So, you want to start a nonprofit? Most likely, you will use some of your own money to start the organization. You might have a few angel donors who are willing to help you get started.


Something to keep in mind as you grow your nonprofit is the “IRS public support test.” The simplest definition states:

at least 1/3 (33.3%) of donations must be given by donors who give

less than 2% of the nonprofit’s overall receipts.”


This means that you and your friends cannot be the only donors on a long-term basis. A public charity, like your nonprofit, must use publicly collected funds to directly support its programs. Also, the IRS expects the boards of directors of charities to have a majority of members who are unrelated by blood, marriage, and outside business ownership.


There are twenty-seven different types of 501c defined by the IRS and each one has categories and subcategories.


The IRS 501c3 status has these four subcategories that are defined by purpose, programs, and revenue sources:

  • 509a1: examples – churches, schools, hospitals, others as defined by source of revenue.

  • 509a2: primarily supported through earned income, such as ticket sales.

  • 509a3: operates in support of another organization, like an auxiliary.

  • 509a4: testing for public safety, such as the American Fireworks Laboratory.


Most likely your nonprofit will fall under the 509(a)(1) subcategory, as defined by source of revenue. You may see this question on grant applications. Your revenue should be a combination of donations from individual donors, private/family foundations, and a small percentage from corporations. Your organization may also earn some income through fees or ticket sales.


The public support test is calculated on a five-year cumulative basis, not any individual year. In addition, the IRS does not require new public charities to demonstrate public support until year six.


Let’s say your nonprofit fails the public support test. You may then submit a request to the IRS Form 990, Schedule A to retain your charity status. This is called the facts and circumstances test.

  • You must demonstrate that at least ten percent of your revenue is from public support.

  • You state that you are operating as a charity, not a foundation.

  • And, that you are actively working increase your public support to 33%.


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 is no guarantee that the IRS will grant your request, but typically they do if the situation seems reasonable.


Keeping the IRS public support test in mind will help your nonprofit focus on diversified funding for sustainable results.


Cheers,


Michelle Crim, CFRE


Dynamic Development Strategies can help. We offer coaching, grant writing, and fundraising services for our nonprofit clients. We specialize in small to mid-size organizations because we understand your challenges. Please contact us for more information.



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