The 33 percent rule—also known as the Public Support Test—is a key IRS requirement that helps determine whether a nonprofit qualifies as a public charity rather than a private foundation. This distinction is important because public charities receive more favorable tax treatment and face fewer restrictions than private foundations.
Purpose of the Rule
The 33% rule is designed to ensure that organizations claiming public charity status are truly supported by the public. To meet this requirement, a nonprofit must receive at least one-third (33⅓%) of its total support from public sources over a five-year period. These sources can include:
- Individual contributions
- Government grants
- Foundation grants (if not from a single source)
- Membership fees
- Program service revenue (if widely available to the public)
If an organization meets or exceeds this threshold, it passes the public support test and retains its public charity classification.
Why 33% Rule Matters
Public charity status comes with significant benefits:
- Donor confidence: Donors often prefer giving to public charities, which are seen as more accountable to the community.
- Tax advantages: Contributions to public charities are subject to higher deduction limits for donors.
- Fewer restrictions: Public charities face fewer operational and reporting burdens than private foundations, particularly in areas like lobbying, grantmaking, and self-dealing.
Failing the 33% test may result in the organization being reclassified as a private foundation—unless it can qualify under an alternative test or seek a ruling from the IRS.
Alternative Qualification: The Facts-and-Circumstances Test
If a nonprofit does not meet the strict 33% threshold but receives at least 10% of its support from public sources and can demonstrate broad public involvement and community support, it may still qualify under the facts-and-circumstances test. However, this test is more subjective and may require additional documentation.
Monitoring and Reporting
The IRS evaluates compliance with the public support test through Form 990, Schedule A, which must be filed annually by most 501(c)(3) organizations. Accurate record-keeping is essential to demonstrate eligibility.
Conclusion
The 33% rule plays a critical role in maintaining public charity status for 501(c)(3) organizations. Nonprofits should monitor their funding sources regularly and file accurate reports to ensure compliance and avoid unwanted reclassification. Understanding and meeting this requirement helps sustain public trust and long-term organizational stability. For any professional assistance, contact us today. Dimov Tax presents expert support for nonprofits.