The 33 1/3 rule—also known as the public support test—is a key requirement that determines whether a nonprofit organization qualifies as a public charity under IRS regulations. This rule ensures that charitable organizations receive a significant portion of their funding from the general public rather than relying on a few private sources. Meeting this test helps nonprofits maintain their 501(c)(3) tax-exempt status and avoid being reclassified as private foundations, which are subject to stricter regulations and additional taxes.
Understanding the 33 1/3 Rule
The 33 1/3 rule requires that a nonprofit organization receive at least one-third (33.33%) of its total support from public sources. These sources can include individual donors, corporations, government grants, and other public charities. The IRS uses this rule to distinguish between public charities, which rely on broad-based public support, and private foundations, which typically depend on a limited number of donors or a single funding source.
Public support is typically calculated over a five-year period, allowing organizations to smooth out fluctuations in funding. The test evaluates contributions, grants, membership fees, and other forms of support to determine whether the nonprofit meets the one-third threshold.
Why the Public Support Test Rule Matters
Maintaining public charity status under the 33 1/3 rule is beneficial for several reasons. Public charities are eligible for more favorable tax treatment, including higher donor deduction limits and exemption from certain excise taxes that apply to private foundations. They also face fewer reporting requirements and enjoy greater flexibility in their operations and grant-making activities.
If a nonprofit fails to meet the public support test rule for two consecutive five-year periods, the IRS may reclassify it as a private foundation. This change can result in additional administrative burdens, such as annual excise taxes on investment income and stricter rules on grant distributions and self-dealing.
How Nonprofits Can Maintain Compliance
To comply with the 33 1/3 rule, nonprofits should diversify their funding sources and actively engage with the public. Strategies include expanding donor outreach, applying for government and corporate grants, and building recurring giving programs. Maintaining accurate financial records and tracking all sources of income are also essential for demonstrating compliance during IRS reviews.
By understanding and meeting the 33 1/3 rule, nonprofits can preserve their public charity status, ensure transparency, and strengthen the trust of donors and supporters. For any professional assistance with the public support test, contact Dimov Tax today.