On July 24, Philanthropy Roundtable published a new policy primer on decoding the public support test. This primer helps explain why the distinction between public charities and private foundations matters, and how nonprofits can use the public support test process to determine whether they qualify as public charities. It also delves into proposed changes that risk making existing requirements even more complicated.
What is Public Charity Status?
Public charity status is a designation that is granted by the Internal Revenue Service (IRS). It allows nonprofit organizations to receive tax-deductible contributions from individuals and corporations. Public charity status also provides several other benefits, such as lower excise taxes and less stringent rules on self-dealing and non-charitable expenditures.
Qualifying for Public Charity Status
To qualify for public charity status, a nonprofit organization must meet certain criteria. Some organizations like churches, schools or hospitals are automatically classified as public charities by the IRS. For other organizations to qualify, they must receive over a third of their total support from the general public and government sources, or receive at least 10% of total support from these sources as well as have a history of receiving funds from the public. If a nonprofit organization meets these criteria, it can apply to the IRS for public charity status. If a public charity fails to meet these criteria, it risks tipping into private foundation status — this reclassification of status comes with significant costs and limitations.
What are the Benefits of Public Charity Status?
These benefits include:
- Lower donor tax-deductible giving limits.
- No excise tax on investment income.
- Less stringent rules on self-dealing and non-charitable expenditures.
- Easier access to grants.
Proposed Regulatory Changes to the Public Support Test Threaten Charities
The public support test is a complex set of rules that charities must abide by to maintain their status as public charities. Proposed regulatory changes to the test could make it even harder for charities to meet requirements and could subsequently have a chilling effect on charitable giving.
One of the proposed changes would treat anonymous contributions from donor-advised funds (DAFs) as coming from a single individual. This would make it harder for charities to count DAF contributions as public support, which could make it more difficult for them to meet the public support test.
It remains to be seen whether such changes will be implemented, but they serve as a reminder that nonprofits must stay vigilant and adaptive to changing regulations and requirements. It is important to balance the need for oversight with the need to maintain a robust philanthropic sector that can effectively serve communities in need.
Read the complete policy primer, “Decoding the Public Support Test: How the IRS Distinguishes Public Charities from Private Foundations,” here.
