What is the 501(c)(3) Public Support Test?
The public support test is a critical topic for tax-exempt organizations to understand and embrace. Because this helps determine how their organization should be funded, it is certainly relevant when it comes to the financial health of the tax-exempt entity.
Whether you are starting up a small nonprofit organization or considering forming a 501(c)(3) organization, this is a topic to become familiar with. In this article, we will cover what the public support test is, how it is determined, and why the results are important for tax-exempt organizations.
An Overview of the Public Support Test
This is a financial test that essentially separates private foundations and public charities. While public foundations can be largely funded by a single donor or even a small collection of donors, this is not the case for organizations that are considered public charities.
A simple example of a private foundation, for the sake of this conversation, would be a family fund that is established and maintained by the members of this family.
All of the money added to the fund may come directly from only one or two members, if the organization is classified as a private foundation, this is perfectly fine.
This is very different for organizations that plan to be classified as public charities. These organizations must prove that they have a reasonable amount of public support, they are not just relying on a few large donors.
They must show that a certain percentage of their gross receipts come from a variety of small donations. They also cannot depend too heavily on the revenue they earn from profit-making activities.
How is the Public Support Test Calculated?
This is the most basic concept of calculating an organization’s public support:
The organization must receive at least ⅓ or 33% of its donations from individuals whose donations make up less than 2% of the organization’s gross receipts.
This is basically saying that if an organization grosses $1,000,000 a year, no individual donor should have given more than $300,000 of this funding. This is over-simplifying the public support test, but it is an easy example to get you started!
This test is crucial for 501(c)(3) tax-exempt organizations and is a part of maintaining their tax-exempt status and good financial standing with the public. Please note that funding obtained from other charitable organizations and federal or state grants are not included in this calculator, there is no limit to the grants that an organization can apply for and attain.
How Often is this Test Performed?
While this test may seem daunting at this point, there is some good news, organizations have six years to operate before they must perform the public support test.
Another benefit to the public support test is that it is performed looking at 5 cumulative years, it’s not based on a single tax year. Once an organization passes, they don’t have to perform the test every year, only every other year.
If the organization fails to pass the public support test for two consecutive years, it will be reverted back to the status of a private foundation. Some organizations that fail may be able to maintain their status of public charity by passing the Facts and Circumstances test. This test proves that an organization is funded at least 10% of the way through public support.
Another way that an organization can lose its status as a public charity is by failing to produce the required Form 990 Tax Returns to the IRS each year. Organizations that continually fail to file can be stripped of tax-exempt status.
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