Schedule A public support test, explained

Every 501(c)(3) organization is either a public charity or a private foundation. A public charity draws its money and oversight from the public; a private foundation is usually funded by one family or company. The difference matters: private foundations file the Form 990-PF, pay an excise tax on investment income and live under stricter rules. Schedule A is where a 501(c)(3) shows, every year, that it is still a public charity.

Who files Schedule A

Schedule A is attached by every section 501(c)(3) organization (and section 4947(a)(1) nonexempt charitable trust) that files Form 990 or Form 990-EZ. Organizations under other subsections, such as 501(c)(4) or 501(c)(6), do not file it. Organizations that file the 990-N don't attach schedules at all.

Part I asks you to check one box describing why you are a public charity. Some reasons need no math: a church, a school, a hospital or a governmental unit qualifies by what it is. Most community charities, though, qualify by the source of their money, and they prove it in Part II or Part III.

The three common routes to public charity status

A supporting organization borrows its public status from the charity it supports. Type I organizations are operated, supervised or controlled by the supported organization, Type II share common control with it, and Type III are operated in connection with it. They complete Part IV of Schedule A instead of a support schedule, and most of them can't file the 990-N even when they are small.

The 170(b)(1)(A)(vi) test: 33⅓% or 10%

Part II measures public support as a share of total support over a five-year computation period: the current tax year and the four before it, including any short years.

• Total support is gifts, grants and contributions, tax revenues levied for the organization's benefit, the value of services or facilities furnished free by a governmental unit, gross investment income, net unrelated business income and other income. Gross receipts from your related activities (ticket sales, program fees) are left out of this test.
• Public support is the gifts, grants and contributions part, minus the portion of any donor's gifts that exceeds the 2% limit described below.

You pass if public support is 33⅓% or more of total support. If you fall short, you can still qualify if public support is at least 10% and the facts and circumstances show you are publicly supported. The IRS looks at whether you run a continuous, bona fide fundraising program aimed at the public, the variety of your sources of support, whether your board represents the broad interests of the public, and whether you provide services or facilities directly to the public. If you rely on the 10% test, you explain these facts in Part VI.

There is one trap. An organization whose support is almost all program fees, with only an insignificant amount from public gifts and grants, fails both tests. That organization should look at 509(a)(2) instead.

The 509(a)(2) test

The 509(a)(2) test in Part III counts a broader set of income as public support, but it has two halves, and both must be met over the same five-year period:

1. More than 33⅓% of support must come from gifts, grants, contributions, membership fees and gross receipts from admissions, sales, services or facilities in activities that are not unrelated businesses.
2. No more than 33⅓% of support may come from gross investment income plus net unrelated business income (after tax) from businesses acquired after June 30, 1975.

Two limits apply. Amounts from disqualified persons (substantial contributors, board members, officers and their families and businesses) don't count as public support at all. And related-activity receipts from any one person or government agency count only up to the greater of $5,000 or 1% of the year's total support. There is no 10% fallback under 509(a)(2).

The 2% limit on large donors

Under the (vi) test, contributions from any single donor count as public support only up to 2% of total support for the five-year period. The excess is still part of total support, so a very large gift raises the denominator without raising the numerator. Gifts from a donor and related persons, such as a spouse, certain family members and entities they control, are added together and treated as one donor.

The 2% cap doesn't apply to:

• governmental units described in section 170(b)(1)(A)(v), and
• publicly supported charities described in section 170(b)(1)(A)(vi), such as a community foundation or a United Way.

Churches, schools, hospitals, organizations supporting state colleges and agricultural research organizations are also exempt from the cap, but only if they also qualify as publicly supported under 170(b)(1)(A)(vi). Grants from private foundations, corporations and individuals are all subject to the 2% limit. Keep the list of donors over 2% in your own records; it does not go on the return, because the return is public.

Unusual grants

A single large gift can push an organization below the line. The rules allow an unusual grant to be excluded from both public support and total support. An unusual grant is generally a substantial contribution or bequest from a disinterested person that is attracted by the organization's publicly supported nature, unusual and unexpected in amount, and large enough to endanger the organization's status under the 33⅓% or 10% test.

You list the amount of each unusual grant in Part VI, without the grantor's name, and keep a private record of the name, date, amount and description. Investment income is never treated as an unusual grant.

The first five years

A new 501(c)(3) is treated as publicly supported for its first five tax years as a 501(c)(3). During those years you check the box on Part II, line 13 (or Part III, line 14 for 509(a)(2)), and skip the calculation on the filed return.

The IRS still recommends running the numbers on a copy you keep, because the test starts to count in year six, and the five-year computation period at that point reaches back into the years you didn't report. New organizations that depend on one founding donor are the ones most often surprised. Our guide to your first Form 990 covers the other early-year rules.

What happens if you fail

Passing the test protects you for more than one year. If your percentage for the current five-year period is 33⅓% or more, you qualify for this year and next year. If you fail this year but passed last year's computation, you still qualify for this year.

If you fail two years in a row, under both the 33⅓% test and the 10% facts-and-circumstances test, and don't qualify under 509(a)(2) or any other Part I category, the organization is treated as a private foundation as of the beginning of the current year for filing purposes. It files Form 990-PF instead of Form 990 and checks "Initial return of a former public charity". Excise taxes and the private foundation rules follow.

If your percentage is trending down, act early: broaden fundraising, check whether 509(a)(2) fits better, and review whether a large gift qualifies as unusual.

990IRS.com is a private company, not the IRS. This page is general information, not legal or tax advice for your organization. Example organizations and figures are hypothetical.