Linda J. Kramer, CPA, MBA
Accounting & Auditing Director
The Public Support Test is a critical measure used by the IRS to determine whether a nonprofit organization qualifies as a public charity rather than a private foundation. This test ensures that the organization receives a substantial portion of its support from the general public or government sources, thereby indicating broad public engagement and support.
Understanding the Public Support Test 
There are two primary tests that an organization can use to qualify as a public charity under Section 501(c)(3) of the Internal Revenue Code:
- The 33⅓ Percent Support Test: To pass this test, at least 33⅓ percent of the organization’s total support must come from governmental units, publicly supported organizations and the general public.
- The 10 Percent Facts and Circumstances Test: If an organization does not meet the 33⅓ percent test, it may still qualify if it receives at least 10 percent of its support from the sources mentioned above and meets additional criteria demonstrating that it is a publicly supported organization based on a combination of factors.
Failing the public support test
An organization fails the public support test if it does not meet the requirements of either the 33⅓ percent support test or the 10 percent facts and circumstances test. This failure can result from several factors:
- Insufficient Public Support: The organization may not receive enough financial support from the general public, government sources, or other public charities. Instead, it might rely too heavily on a small number of large donations from private individuals or entities.
- Improper Accounting: Errors or omissions in accounting for public support can lead to a failure to accurately report the sources of income.
- Timing Issues: Public support calculations are based on a rolling five-year period. A decline in public support over this period can lead to failure, even if the organization previously met the requirements.
Ramifications of failing the Public Support Test
Failing the Public Support Test has significant ramifications for a nonprofit organization. The primary consequence is reclassification as a private foundation. Private foundations are subject to more stringent regulations and oversight compared to public charities. Private foundations must pay an excise tax on their net investment income and also must adhere to more rigorous reporting requirements and are subject to additional restrictions on their activities, such as prohibitions on certain types of investments and transactions. Additionally, many grant-making organizations and governmental programs specifically fund public charities. Losing public charity status can make the organization ineligible for these grants and funding opportunities.
Reapplying to become a publicly supported charity
After failing the Public Support Test and being reclassified as a private foundation, an organization can take steps to regain public charity status. The process involves several key steps including evaluating why it failed the Public Support Test and developing a strategic plan to increase public support. This might involve diversifying fundraising strategies, enhancing public outreach, and improving accounting practices to ensure accurate reporting of public support. The organization must actively work to increase the proportion of its income derived from public sources.
In order to reapply, the organization must meet the requirements of either the 33⅓ percent support test or the 10 percent facts and circumstances test over a defined period. This typically involves demonstrating compliance over a five-year period. Once the organization believes it has met the Public Support Test criteria, it can reapply for public charity status by filing Form 8940 (Request for Miscellaneous Determination) with the IRS. This form includes detailed information about the organization’s sources of support and activities to demonstrate compliance with the public support requirements.
Long-term considerations
Regaining public charity status is not merely a bureaucratic hurdle; it requires a sustained commitment to public engagement and diversified funding sources. Organizations must continually assess and adapt their fundraising strategies to maintain a broad base of support. This ongoing effort helps ensure stability and credibility, fostering long-term success and sustainability in fulfilling their charitable missions.
In conclusion, failing the Public Support Test and being reclassified as a private foundation has significant implications for a nonprofit organization. However, with strategic planning, focused efforts to increase public support, and careful compliance with IRS requirements, organizations can reapply and potentially regain their status as publicly supported charities. This process underscores the importance of maintaining broad-based public support to fulfill their charitable objectives effectively.
If you would like more information about the Public Support Test and how it affects your organization, contact us.
