Organizations that qualify for tax exemption under Section 501(c)(3) are classified as either public charities or private foundations. Public charity status is generally more favorable, but an organization must meet specific requirements to qualify.
Most organizations qualify as public charities by meeting one of the IRS “public support tests.” These rules focus on whether the organization receives support from a broad base of donors or from program-related activities, rather than relying on a small number of contributors.
Under Section 509(a), an organization is presumed to be a private foundation unless it qualifies as a public charity in one of the following ways:
For most nonprofit organizations, the public support tests are the primary path to public charity status.
There are two categories of public support tests, with three tests in total:
Each test compares different types of revenue to determine whether the organization is broadly supported.
This is the primary and most commonly used test. An organization qualifies if at least one-third of its total support comes from public sources.
In general:
Large contributions from a single donor are limited in how much can be counted toward public support, which prevents organizations from relying too heavily on a small number of contributors.
If an organization cannot meet the 33 1/3% threshold, it may still qualify if it has at least 10% public support and can demonstrate that it is publicly supported based on its overall structure and operations.
The IRS may consider factors such as:
This test involves IRS discretion and is less predictable than the 33 1/3% test.
This test is commonly used by organizations that receive a mix of donations and program-related revenue, such as fees for services.
It has two requirements:
Unlike the 10% test, this is a strict mathematical test. If both parts are not satisfied, the organization does not qualify under this section.
Public support is not measured in a single year. Instead, the IRS applies a rolling five-year test that includes the current year and the four preceding years.
This means an organization’s classification can change over time. An organization that meets the test in one period may fail it in a later period if its funding sources shift.
As a result, organizations should monitor their revenue sources and donor concentration on an ongoing basis.
Public charity status affects how an organization is regulated, how donors are treated, and whether certain taxes apply.
For an overview of the exemption application process, see Applying for 501(c)(3) Tax-Exempt Status.
If you are forming a nonprofit organization, see New York nonprofit formation.
Jonathan Lefkowitz is a New York attorney who advises nonprofit organizations on formation, federal tax exempt status under Section 501(c)(3), and regulatory compliance.
For additional information, see Lefkowitz Law Firm.
This page is provided for general educational purposes only and does not constitute legal advice.