The "Hidden" IRS Rule that Trips Many Nonprofits

Compliance with the IRS’ public support test is not well understood by 501(c)3 organizations, or even by many foundations that support them. In a nutshell, in order for organizations to maintain their public charity status with the IRS, they are required to have one-third of their support come from the general public and/or governmental sources (the "public support test"). Large grants can easily upset this ratio, potentially leading the IRS to reclassify your public charity as a private foundation (“tipping”).

This is a complex topic (which does not affect fiscally-sponsored organizations, by the way), and we are on a learning journey ourselves to figure out how to provide financial support to help organizations “level up” without harming their public charity status. So we wanted to use the April 2022 Community Zine to create more awareness and conversation about this topic. The following is an overview of the public support test and “tipping,” which we pulled from this article.

If you are a small or start-up 501(c)3 organization, a piece of advice we’ve heard again and again is that it’s important to have tax professionals and financial advisors who understand this issue so that they can help you navigate and plan. For additional information, see the links below for another resource about tipping.