Organizations that qualify for tax exemption in section 501(c)(3) are considered private foundations unless they fall under one of the categories specifically excluded from the definition of private foundation in section 509(a). Section 509(a)(1) excludes publicly supported organizations from private foundation status.

An organization which has qualified as a publicly supported charity with the IRS must annually perform a calculation on Form 990, Schedule A, showing that it continues to qualify as a publicly supported charity. The public support percentage is calculated using a five-year computation period that includes the current year of filing as well as the prior fiyr tax years. Basically, if the organization’s calculated public support percentage is 33 1/3% or greater in one of two consecutive years, it will continue to qualify as a publicly supported charity. However, if the entity fails the public support test for two consecutive years, it may be able to keep its publicly supported charity status if it meets the requirements of the facts and circumstances test.

The facts-and-circumstances test is composed of several factors that the organization must meet in order to maintain its publicly supported status. These factors include ten percent of support requirement, attraction of public support requirement, percentage of financial support factor, sources of support factor, representative governing body factor, availability of public facilities or services factor, and additional factors pertinent to membership organizations. If the organization does not pass this test, the organization will be classified as a private foundation.

At what point does a publicly supported charity risk losing its current status and becoming classified as a private foundation? A publicly supported charity can lose its current status and be classified as a private foundation if it fails to meet the public support test as discussed above. Large donations, along with many other scenarios, can alter the public support calculation and put the entity’s public charity status at risk, so it is important for organizations to be aware of this and monitor their calculation.

If you have any questions regarding the article above or any other issue affecting your not-for-profit organization, please contact your Blue & Co. advisor.