Key Takeaways
- Public support thresholds require ongoing monitoring. Falling below required levels can trigger reclassification and loss of key tax advantages.
- Calculation errors can materially impact results. Misclassifying revenue or failing to aggregate donors may distort public support percentages.
- Proactive planning helps preserve status. Diversifying funding sources and tracking support trends reduces risk of failing the test.
Recently, I have worked with several not-for-profit organizations that have raised questions about the public support test. Often this arises from an organization reaching the end of its initial five years of operations or as a result of operational changes in an organization that has been in existence for a while.
The public support test, included in Schedule A of Form 990, is required to be completed annually to maintain public charity status. An organization that fails the public support test is reclassified as a private foundation.
Why Public Charity Status Matters
Organizations that maintain their public charity status can offer higher donor deductibility limits, remain exempt from private foundation excise taxes, and typically are viewed more favorably by the public for donations and grants.
Two Options for Public Support Tests
There are two main tests used to calculate the organization’s public support levels, and both use a rolling five-year period (the current tax year and the prior four years). Organizations that are in their first five years of operations are exempt from these tests. Unusual grants are excluded in both calculations. A grant is defined as unusual if the grant is:
- Attracted because of the organization’s publicly supported nature
- Unusual and unexpected because of the amount, AND
- Large enough to endanger the organization’s status as normally meeting the public support test
The two main tests are described below.
Test #1: Support Schedule for Organizations Described in Sections 170(b)(1)(A)(iv) and 170(b)(1)(A)(vi) – Part II of Schedule A of Form 990
This test is used for organizations that check the box on line 5, 7, or 8 of Part I of Schedule A. These tend to be organizations primarily supported by contributions and grants or those that fail to qualify under Part III.
- Line 5 = An organization operated for the benefit of a college or university owned or operated by a governmental unit described in section 170(b)(1)(A)(iv).
- Line 7 = An organization that normally receives a substantial part of its support from a governmental unit or from the general public described in section 170(b)(1)(A)(vi).
- Line 8 = A community trust described in section 170(b)(1)(A)(vi).
A not-for-profit organization qualifies under this calculation if 33 1/3% of its total support comes from public support. Public support includes:
- Individual donations
- Government grants
- Grants from other not-for-profit organizations
- Membership dues
- Corporate donations
However, organizations are limited to only the first 2% of total support from any one donor when calculating their public support. This applies to all donations except those from governmental units or other publicly supported organizations. For example, if total support for the past five years is $1,000,000, the 2% limit would be $20,000 and any contributions over the $20,000 would be backed out from public support.
If an organization fails the 33 1/3% test in a certain year but passed in the prior year, the organization is given a one-year grace period and allowed to use its prior year support test to qualify as a publicly supported organization.
After two years of being under 33 1/3%, the organization must look at the 10% facts and circumstances test. To qualify under this test, the organization must have at least 10% of public support and must provide a narrative at the end of Schedule A. This narrative must explain whether the organization maintains a continuous and bona fide program for solicitation of funds from the general public. It must list all other facts and circumstances, including the sources of support, whether the organization has a governing body that represents the broad interests of the public, and whether the organization generally provides facilities or services directly for the benefit of the general public on a continuing basis.
Test #2: Support Schedule for Organizations Described in Section 509(a)(2) – Part III of Schedule A of Form 990
This test is used for organizations that check the box on line 10 of Part I of Schedule A. These are typically organizations supported by a mix of contributions and program revenue or those who failed to qualify under Part II.
- Line 10 = An organization that normally receives:
- More than 33 1/3% of its support from contributions, membership fees, and gross receipts from activities related to its exempt functions, subject to certain exceptions; and
- No more than 33 1/3% of its support from gross investment income and unrelated business taxable income (less section 511 tax) from businesses acquired by the organization after June 30, 1975. See section 509(a)(2).
Under this calculation, the organization must have at least 33 1/3% public support (public support plus program revenue) compared to total support and no more than 33 1/3% of investment income and unrelated business taxable income compared to total support.
Similar to the first calculation, this calculation also limits donations but, in this case, donors have a 1% limit of total support. There is no exemption for governmental units or public charities.
Common Errors in Public Support Calculation
There are several mistakes that organizations make while completing the Schedule A public support calculation including:
- Reporting government contracts as contributions when they are actually exchange transactions. Not-for-profit organizations must analyze contracts closely to ensure that grants and other revenue sources are being appropriately recognized, which directly impacts financial statements in addition to presentation and calculations on the 990
- Forgetting to aggregate donors across years. As organizations must back out donors who are over a threshold (2% in Part II and 1% in Part III), it’s critical that donors are aggregated over the five year calculation periods to appropriately back out excess donors
- Not identifying unusual grants. See definition above of unusual grants
Planning Strategies for Organizations Close to Failing the Public Support Test
For not-for-profit organizations that are trending down in their public support calculation, there are several proactive steps that the organization can take to maintain its public charity status.
- Diversify fundraising efforts including expanding membership programs, increasing campaigns for small donors who would be under the excess contribution limit, or focusing on contributions from governmental units or public charities (for part II calculations)
- Manage large gifts carefully including encouraging donor-advised fund contributions (as these are considered public charities for Part II calculation) or working with donors to structure large gifts as unusual grants
- Increase program revenue (for Part III organizations). Organizations that use program revenue as part of their calculations can add additional revenue- producing programs or increase fees for existing programs
- Track support more frequently. While many organizations only complete their public support calculation annually as part of the Form 990 preparation, those that are close to failing should analyze this calculation more frequently. This includes identifying concentrations in donor contributions and adjusting fundraising strategies before year-end
- Monitor investment income. Organizations can consider investing in their programs rather than passive investments that encourage larger investment income
- Reclassifying if necessary. Publicly supported organizations can switch between the two calculations if the organization meets the alternate test
Take Control of Your Public Support Test Before It Puts Your Status at Risk
The public support test is not just a compliance requirement; it’s a critical measure of your organization’s financial health, fundraising strategy, and long‑term sustainability. Proactively monitoring your Schedule A calculations, understanding how changes in funding sources affect your Form 990, and planning ahead can help you avoid unexpected reclassification as a private foundation.
If you have any questions or would like to discuss your organization’s public support calculation or planning strategies, please contact Katie Galaska, Director, Not-for-Profit Industry Group.