October 2011

Much Ado About the IRS' Public Support Test

To maintain their nonprofit status, 501(c)(3) organizations must pass the IRS' Public Support Test in their sixth year and annually thereafter. Failing to pass the PST could result in the group's nonprofit status being revoked. Thus, the PST represents the import of a solid development program and a broad-base of support.

Ceterus, an accounting firm, notes, "In the midst of advancing liberty, free-market think tanks can lose track of the behind-the-scenes details of compliance. One area of confusion is the Public Support Test, which can be found on Schedule A of the IRS Form 990. The calculation for the PST is somewhat complex; 'Estimating Your Public Support,' below, is our best attempt to simplify it."

Note: The simplified Public Support Test described below should be considered an estimating tool only. Organizations should consult with a lawyer or certified public accountant versed in 501(c)(3) law and / or accounting for any PST calculations per IRS guidelines.

Estimating Your Public Support

1. Determine total income received for past 5 years cumulatively. This includes interest income, unrelated business income and contributions. This is total income (TI).

2. Determine what amount equals 2% of total income.

3. Identify each individual giving unit except government and a 501(c)(3). This could be individuals, foundations and corporations.

Note: Gifts received from other 501(c)(3) organizations are considered 100% public, so they actually help your PST%.

4. For each of these individual giving units, add together their cumulative total given for the past 5 years individually.

5. Identify all giving units whose cumulative giving from step 4 exceeds 2% of TI. Take the total giving from each giving unit and subtract 2% of TI from it. This equals the non-public (NP) amount.

6. Public support (PS) equals TI less NP.

7. Take PS and divide by TI for PS%.

8. Public Support Tests:

A) If PS% is over 33 1/3% then you can stop and go on from there.

B) If PS% is below 33 1/3 %, you can perform the same test, only looking at the previous year (not last 5 years), if this is over 33 1/3%, you are fine.

C) If the above is also below 33 1/3%, then there is an alternate test you can do where the percentage only needs to be over 10%.

Note: If this is the organization's first 5 years, there is no requirement to calculate the PST, as new organizations are exempt from it. However, the PST for years 2-5 will be used in calculating the PST in the 6th year, so keeping track of it still makes for good financial policy.

Example

• Between 2006 and 2010 Think Tank 1 had $3,000,000 in income, $1,500,000 was from company A and $250,000 was from individual X, no other donor gave more than $15,000 over this period.

• Total Income = $3,000,000

• 2% of Total Income = $60,000

• Company A = $1,500,000 - $60,000 = $1,440,000 (Non-Public)

• Individual X = $250,000 - $60,000 = $190,000 (Non-Public)

• Total Non-Public = $1,630,000

• Public Support = Total Income - Non-Public = $3,000,000 - $1,630,000 = $1,370,000

• Public Support % = PS/TI = $1,370,000/$3,000,000 = 45.67% Public Support = PASS the PST

So, even though half of its support was from one source, this think tank passes the PST.