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Don’t Lose Your 501(c)3 Status- Navigating the IRS Public Support Test

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The IRS public support test is a requirement for certain nonprofits with 501(c)(3) status, specifically those classified as public charities rather than private foundations. The purpose of the public support test is to ensure that a nonprofit organization receives a substantial amount of its funding from public sources rather than relying heavily on a limited number of private donors.

Here's an overview of the IRS public support test, the review process, and potential misclassification issues:

Public Support Test:

  • The public support test evaluates whether a nonprofit organization qualifies as a public charity by demonstrating that it receives a sufficient level of public support.

  • To meet the test, a nonprofit must show that it receives a substantial amount of support from the general public, such as individuals, government agencies, and other public charities.

  • The IRS requires that a public charity receive at least one-third of its total support from public sources (individuals, government, and other public charities) to pass the test.

Calculation of Public Support:

  • Public support is calculated based on the organization's total support during a defined period, usually a five-year "base period" or a shorter "initial support" period for new organizations.

  • The IRS distinguishes between "public support" and "private support." Public support includes gifts, grants, contributions, membership fees, and certain government payments.

  • Private support, which includes donations from individuals, corporations, and private foundations, is subject to limitations to prevent excessive reliance on a small number of donors.

Review Process:

  • The IRS reviews a nonprofit organization's public support by examining the financial information provided in the organization's annual Form 990 or Form 990-EZ filing.

  • Organizations must report their public support and private support on Schedule A of Form 990, including detailed breakdowns of contributions from different sources.

  • The IRS analyzes the reported data and calculates the public support percentage to determine if the organization continues to meet the requirements for public charity status.

Review Frequency:

  • The IRS typically reviews a nonprofit organization's public support every five years, considering the most recent five-year period as the base period.

  • However, if there are indications of substantial changes in the organization's funding sources or activities, the IRS may conduct an intermediate review outside the regular five-year cycle.

  • If an organization fails to meet the public support test during the review, it may be reclassified as a private foundation, subject to different tax rules and limitations.

Misclassification Issues:

  • Misclassification can occur if a nonprofit organization incorrectly reports its sources of support or fails to accurately calculate public and private support percentages.

  • If a nonprofit fails to meet the public support requirements but continues to operate as a public charity, it may face potential penalties, loss of tax-exempt status, or other adverse consequences.

  • It is crucial for nonprofits to carefully track and report their sources of support, maintain accurate financial records, and seek professional advice if they have any concerns about meeting the public support test.

It's important for nonprofit organizations to understand and comply with the public support test requirements to maintain their tax-exempt status as a public charity. By ensuring accurate reporting of public and private support, nonprofits can demonstrate their broad-based community support and continue to fulfill their charitable missions effectively.

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