The IRS uses the public support test to check if a nonprofit receives substantial support from the general public, as outlined by Section 509(a) of the Internal Revenue Code. This test determines if a nonprofit is a private foundation or a public charity.

According to the IRS, an organization is a publicly supported charity if it meets one of two tests:

1. The organization receives a substantial part of its support in the form of contributions from publicly supported organizations, governmental units, and/or the general public. Example: A human service organization whose revenue is generated through widespread public fundraising campaigns, federated fundraising drives, or government grants is a publicly supported charity.

2. The organization receives no more than one-third of its support from gross investment income and more than one-third of its support from contributions, membership fees, and gross receipts from activities related to its exempt functions. Examples: A membership-fee organization, such as parent-teacher organization, or an arts group with box office revenue is a publicly supported charity.

The IRS further advises:

An organization will lose its public charity status if it cannot pass the public support test for two consecutive years. If the organization cannot meet the public support test for two consecutive years, it will be reclassified as a private foundation as of the start of the second consecutive year. To avoid unexpectedly losing your public charity classification, you should keep careful track of your public support information through out the year.

IRS Pub. 557: Tax-Exempt Status for Your Organization, details how to calculate public support (see pp. 29-35, "Qualifying as Publicly Supported"). Also, most handbooks on establishing a nonprofit organization have a section on calculating public support.

See also our related Knowledge Base article:

- What is the difference between a private foundation and a public charity?

More articles on starting a nonprofit»