After identifying whether an organization is a “Donor-Supported” entity (Section 170(b)(1)(A)(vi)) or a “Related Revenue” entity (Section 509(a)(2)), which determines which public support rules apply to an organization, the next critical question is how public support is measured. Many nonprofit leaders are surprised to learn that public support is not evaluated on a year-by-year basis, but instead through a rolling, multi-year calculation that can magnify the long-term impact of today’s fundraising decisions.
For boards, executive directors, and finance committees, understanding how the IRS measures public support is essential to anticipating compliance risks and avoiding unintended reclassification as a private foundation.
The Five-Year Computation Period
Public support is measured over a five-year computation period that includes the current tax year and the four immediately preceding tax years.
Each year, the computation period shifts forward by one year, meaning that older years drop out of the calculation while new years are added. As a result, changes in fundraising patterns may not immediately affect an organization’s public support percentage, but their impact can compound over time. Helpfully, the rolling window provides a buffer against temporary setbacks, such as a one-year drop in donations or a single-year windfall that might otherwise distort public charity’s status. Conversely, every major financial event has a half-life. A large donation from a single source will remain in a nonprofit’s denominator (the total support figure) for five full years, potentially pulling down its public support percentage long after the money has been spent. Thus, proactive management of public support is a necessity.
Public support calculations are reported annually on Schedule A of IRS Form 990, which is subject to public disclosure.
Public Support Versus Total Support
The IRS calculates public support by dividing an organization’s public support by its total support for the applicable five-year period. While this formula appears straightforward, the definitions of these terms are highly technical and vary depending on an organization’s classification.
In general terms:
- Public support may include contributions from the general public, grants from governmental units, certain membership fees, and, in some cases, program-related revenue. It excludes the portion of individual gifts that exceed 2% of an organization’s total support (for Donor-Supported entities) and entirely excludes gifts from “disqualified persons” (for Related Revenue entities). The next post[A1] in this series will describe these rules in detail.
- Total support generally includes all contributions, grants, interest and investment income, and other revenue received during the computation period.
Importantly, not all revenue counts equally toward public support. Certain sources of funding may be included in total support but limited or excluded when calculating public support, depending on the applicable test.
Special Considerations for New Organizations
Newly formed public charities may rely on their initial IRS classification during their first five tax years. During this period, the organization is not required to demonstrate compliance with a specific public support test.
It will be required to first demonstrate compliance by reporting data on its Form 990 Schedule A filed for the sixth year of existence. But this is not just a test of Year 6; it is a cumulative test of everything that happened from Year 1 through Year 5. Organizations that do not track their donor diversity during their “startup” period often find themselves unprepared for the harsh reality of the Year 6 calculation, where a failure to meet the test can lead to immediate reclassification as a private foundation retroactive to January 1st of its sixth year. Early monitoring and forecasting can help avoid this risk.
The Importance of Ongoing Monitoring
A common compliance pitfall occurs when organizations assume that past success ensures future compliance. Because public support is measured on a rolling basis, even well-established charities can face challenges if their funding sources become more concentrated or shift toward investment income. For example, a single large donation received in one year may continue to affect the calculation until that year falls outside the computation period. Conversely, a strong year of diversified fundraising may help stabilize public support percentages even if subsequent years are less robust.
Regular review of Schedule A, collaboration with financial advisors, and board-level awareness of public support trends are critical components of effective nonprofit governance. By modeling five-year impact scenarios and identifying donors who are impacted by the 2% cap, boards can pivot their fundraising strategies, perhaps focusing more on broad-based donor strategy, to strengthen their public support before a crisis emerges.
Looking Ahead
Understanding how the IRS measures public support lays the groundwork for evaluating whether an organization meets the applicable public support test. By mastering the equation’s mechanics and implementing board oversight, nonprofit leaders can ensure their organizations remain accountable and firmly classified as public charities in the eyes of the IRS.
In the next article in this series, we will examine the 33⅓% public support test and the 2% limitation rule, and how large or concentrated donations can unexpectedly affect compliance for donor supported public charities.