By Zoe Joens, CPA
What is the Form 990 Public Support Test…and What Happens if We Fail?
The public support test is a complicated yet crucial part of Form 990. 501(c)(3) public charities must pass the public support test to maintain their tax-exempt status. If a charity fails the test for two consecutive years, the IRS will reclassify it as a private foundation and revoke its tax-exempt status. The public support test is calculated on Form 990, Schedule A, Part II for organizations described in Sections 170(b)(1)(A)(iv) and 170(b)(1)(A)(vi) or Part III for organizations described in Section 509(a)(2). Fortunately, organizations are not bound to the public support test specified in their IRS determination letter and can annually determine the most accurate and advantageous test.
Calculating Public Support Under Each Test
Schedule A, Part II
Public charities that receive most of their revenue from contributions should use the public support test defined in Part II. The test is computed using a five-year period (the current year and four previous years). New organizations are not required to pass the public support test until after their fifth year of existence. The public support percentage must be 33.3% or more and is calculated as:
(Part II, Line 4 – excess contributions1) ÷ total support
1 Excess contributions are contributions included in Part II, Line 1 from any one donor to the extent they exceed 2% of total contributions for the five-year period. Contributions from government entities or other public charities are not included in excess contributions.
Schedule A, Part III
Public charities that receive most of their revenue from program revenue (receipts from activities that further the organization’s exempt purpose) should use the public support test defined in Part III. This test uses the same five-year computation period and must be passed after the organization’s fifth year of existence. The percentage must also be 33.33% or more and is calculated as:
(Part III, Line 6 – support from disqualified persons2 – excess receipts3) ÷ total support
2 A disqualified person includes board members, certain family members, and substantial contributors. Substantial contributors are any donors who give, in total since inception, the greater of $5,000 or 2% of total contributions since inception. Government entities and public charities are not included. Once a donor is defined as a substantial contributor, they typically remain a substantial contributor indefinitely.
3 Receipts included in Part III, Lines 2 or 3 from any one entity to the extent they exceed the greater of $5,000 or 1% of total support for the year.
Part III also has an investment income test. Over the five-year computation period, total investment income must be 33.33% or less of total support.
What if We Fail?
- Don’t panic. Charities only risk losing tax-exempt status if they fail the public support test for two consecutive years. If it’s your first year failing, refer to your organization’s public support calculation and try to increase the numerator next year. For example, soliciting contributions from government entities or public charities will increase the public support percentage under both tests.
- Identify unusual grants. Certain donations may qualify as unusual grants, which are excluded from the public support calculation.
- Try the other test. Organizations can use whichever test enables them to retain their public charity status. However, note that switching from Part II to Part III requires detailed contribution information dating back to the organization’s inception, as well as an additional investment income test.
- 10% facts and circumstances test. If you failed the public support test for two consecutive years but your percentage is at least 10%, you may use the facts and circumstances test. Under this subjective test, your organization explains relevant facts and circumstances to establish that it is publicly supported. Note that this test is only available under Schedule A, Part II.
For more information, see the IRS Instructions for Schedule A here.
Partner with Jacobson Jarvis
If you have questions about your Public Support Test or need assistance with your organization’s Form 990, contact Jacobson Jarvis today to see how we can help!
About the Author:
Zoe Joens, CPA
Zoe joined Jacobson Jarvis in February of 2022. She entered public accounting in 2020 after finishing her master’s in taxation at Gonzaga University. She is passionate about using her education and experience to assist not-for-profits and serve our communities. Zoe is currently the Treasurer of Cheer Seattle, a local 501(c)(3) public charity.