501( c )(3) Public Support Test: How to Pass and Stay Tax-Exempt

The 501(c)(3) public support test is crucial for nonprofits to maintain their tax-exempt status. If you’re managing or operating a nonprofit organization with 501(c)(3) status, it’s important to understand this requirement and its role in your organization’s compliance. 

What is the Public Support Requirement?

The public support requirement is a guideline from the IRS that ensures nonprofit organizations are primarily supported by the public, rather than a select group of private individuals or entities. In essence, the IRS wants to make sure that organizations receiving tax-exempt status are working for the public good, not just serving the interests of a few private donors or family members.

For a nonprofit to retain its 501(c)(3) status, it needs to show that the majority of its funding comes from a broad base of support, including donations, grants, and contributions from the general public, rather than relying on a few wealthy individuals or private sources.

How the Test Works

To determine whether an organization meets the public support test, the IRS looks at its sources of funding over a specific period, typically five years. There are two main methods for assessing whether a nonprofit meets the public support requirement:

1. The 33% Support Test: The most commonly used rule, requiring that at least one-third of the nonprofit’s funding comes from public donations, grants, and other public sources. This means that no single donor or private entity should account for more than one-third of the total funds received during that time.

2. The Facts and Circumstances Test: If an organization doesn’t meet the 33% rule, it may still pass if it can show that it is primarily supported by the public or government sources through other means. This test is more subjective, allowing the IRS to consider the specific situation of the organization.
   
   

Key Factors in the Test

The IRS focuses on several key factors to evaluate public support:

• Donations from the Public: The primary source of income for the nonprofit should come from individual donations, fundraising activities, and other charitable contributions.

• Government Support: Money from government grants or public funds can also count toward the public support requirement.

• Avoidance of Private Funding: Nonprofits should avoid being primarily funded by a small group of private donors or family members. Too much reliance on a few sources of funding could jeopardize the nonprofit’s public charity status.

How to Ensure You Pass the Public Support Test

To pass the public support requirement, nonprofit organizations should take proactive steps:

• Diversify Revenue Streams: Aim to raise funds from a broad range of sources. This might include individual donors, corporate sponsorships, grants, and fundraising events.

• Track Contributions: Keep thorough records of all sources of income, documenting the amount and origin of each donation or grant. Crowded seamlessly tracks cash flow and autogenerates reports on donations and spending making it effortless when time to demonstrate public support.

• Regular Fundraising: Engage in consistent and transparent fundraising efforts to maintain broad-based community support, ensuring that the majority of funds come from the public rather than private or unrelated sources.