Nonprofit Accounting Basics

Schedule A: The Key to Maintaining Public Charity Status

Note: Articles published before January 1, 2017 may be out of date. We are in the process of updating this content.

Many public charities have to pass an annual public support test in order to maintain public charity status and avoid being classified as private foundations. Certain types of organizations are exempted from this test. Exempted organizations include: churches, schools and colleges, hospitals, Section 509(a)(3) supporting organizations, and certain others.

This numerical test is completed annually on Schedule A, which is required of all publically supported IRC 501(c)(3) organizations. Organizations exempted from the test only have to complete Part I of the schedule which identifies the type of organization. Organizations which are not in an exempted category must fill out one of two support schedules (Part II or Part III). Part II applies to organizations described in IRC 170(b)(1)(iv) and 509(a)(1); Part III applies to organizations described in IRC 509(a)(2). The determination of IRC 170(b)(1)(iv) or 509(a)(2) status is typically found on the determination letter the organization received when it first obtained exempt status.

The Two Tests

Part II organizations “normally receive a substantial part of support from a governmental unit or from the general public,” in general, one third. Part III organizations “normally receive (1) more than 33 and 1/3 percent of its support from contributions, membership fees, and gross receipts related to exempt functions—subject to certain exceptions, and (2) no more than 33 and 1/3 percent of its support from gross investment income and unrelated business income.” Each of the tests looks at the cumulative support for the year being reported plus the prior four years, so any one year is not definitive in terms of passing or failing on public support. Organizations now are excused from passing the test in the first five years of existence, giving them time to establish broad support.

For both tests, certain “unusual” grants may be excluded from both the numerator and denominator of the calculation. Unusual grant are grants and bequests from disinterested persons or organizations that are (1) attracted because of the organization’s publicly-supported nature, (2) unusual and unexpected because of the amount, and (3) large enough to endanger the organization’s status with regards to meeting the 33 and 1/3 public support test. Such grants must be listed in Part IV of Schedule A but without donor names. The most common unusual grants are typically large bequests from estates or large one-time “start-up” grants early in an organization’s life. IRC Regulations 1.509(a)-3(c)(4) contains a list of other factors to consider in determining if a grant is unusual. An organization may request a determination from the IRS on the whether a grant is unusual, but this is not required. Form 8940 is used for these advance requests.

The Part II schedule for 509(a)(1) public charities is the easiest to complete. Basically, it adds up all of the contributions and grants received over the five-year period and subtracts the amount of total contributions (except from governmental units or other public charities) from any one contributor which exceeds 2% of the total amount of contributions over the five-year period. This number becomes the numerator for the calculation. The denominator is the total amount of support including contributions, investment income, unrelated business income, and all other income. If the resulting percentage is 33 and 1/3 percent or higher when the numerator is divided by the denominator, the organization has passed the test. However, on this test only (not on the 509(a)(2) test), an organization with over 10% public support but less than 33 and 1/3%, may be deemed to pass the test under a “facts and circumstances test:” check a box and supply the reasons why the facts and circumstances make the organization a publicly-supported charity. The various criteria for the facts and circumstances involved in this assessment are beyond the scope of this article, but a nonprofit tax expert can provide these if needed.

The Part III schedule is more complex. As mentioned above, it tests for both level of public support and level of investment and unrelated business income over the five-year period. Public support typically includes contributions and grants plus receipts from activities that are not unrelated activities (e.g., membership dues or program fees). This number is reduced by two different factors: amounts of contributions and program receipts from “disqualified persons” and amounts of activity fees from non-disqualified persons that exceed the greater of $5,000 or 1% of total support for each year in the test. Total support includes all of the above plus investment income, unrelated business income, and all other income. “Disqualified persons” includes both organization insiders, such as officers, directors, and “substantial contributors.” (A full definition of this term is included in the glossary of terms in the Form 990 instructions.) Once the numerator is reduced by both factors, it is then divided by total support to determine if public support is above 33 and 1/3%. As mentioned above, there is no “facts and circumstances” relief for Part III organizations whose percentage falls below 33 and 1/3%. The other part of the Part III calculation is to divide investment and unrelated business income by total support. If that result is above 33 and 1/3%, then the organization also fails the test.

When an organization fails the five-year test two years in a row, it automatically becomes a private foundation and should begin filing Form 990-PF.

Planning and Options

It is important to keep accurate records of the various numbers that go into these calculations each year. Before actually failing public support tests, the organization and its advisors should be on alert if public support percentages are trending in the wrong direction. They should consider ways to gain more public support in order to avoid ultimately failing the test after five years. Projections can be made for future years to determine approximately what is going to be required to pass in the next several years.

One option for an organization trending toward failure or failing at year end, is to examine how it would fare if it were utilizing the other test. Often an organization has changed over the years from one that relies mostly on donations and grants to one that relies upon a significant amount of program revenue (and vice-versa). Under current rules, an organization may switch from one test to another without getting permission from the IRS. It must check the box in Part I for the other type of organization and then complete the entire five-year schedule based upon the new type of organization. This, of course, requires digging into past records of donor and program fee amounts and applying the various thresholds to determine what amounts should be subtracted from the nominator of the calculation.

For organizations related to other exempt organizations, there is the possibility they could qualify as a supporting organization for the other organization and not have to pass this annual test at all. Consult a nonprofit tax professional to see if this is a possibility.


Public support is a very complex calculation with many nuances and special rules. But it is of vital importance to every organization for which it is required. Organizations and their advisors should (1) be very careful to determine this is being calculated correctly, and (2) keep a careful eye on the percentage(s) so corrective action may be taken before it is too late.