In the prior post in this series, we explored how the IRS measures public support, including the five-year computation period and the distinction between public support and total support. With that framework in place, this article turns to the most widely applicable compliance threshold for donor-supported public charities: the 33⅓% public support test and the critical 2% limitation rule that governs how individual contributions are counted.
For nonprofit leaders, understanding how the 33⅓% test works, and how the 2% cap can unexpectedly affect an organization’s public support calculation, is essential to maintaining public charity status and avoiding unintended reclassification as a private foundation.
The Public Support Test in Practice
As discussed in earlier posts, organizations classified under Section 170(b)(1)(A)(vi)—often referred to as “Donor-Supported Entities”—must demonstrate that a substantial portion of their total support comes from public or governmental sources.
Most nonprofits qualify under one of two primary tests:
• The 33⅓% Public Support Test
• The 10% Facts and Circumstances Test
The most common path is the 33⅓% test. Under this test, at least one-third of the organization’s total support must come from the general public, government grants, or other qualifying sources.
These sources often include:
• Contributions from the general public (individuals, corporations, and other organizations, however see below regarding the 2% limitation)
• Grants from governmental units (federal, state, or local)
• Contributions from other publicly supported organizations
Crucially, public support is measured over a rolling five-year period and is reported annually on Schedule A of IRS Form 990. However, a single failure of the test will not automatically trigger a reclassification. An organization’s public support percentage must fall below 33⅓% for two consecutive years before the IRS will reclassify it as a private foundation retroactive to the first day of the second year of failure (e.g., if an organization failed the test for calendar years 2026 and 2027, it would be reclassified as a private foundation effective January 1, 2027). As discussed in the first post in this series, the consequences of reclassification include excise taxes, mandatory annual distribution requirements, stricter self-dealing rules, and heightened administrative burdens.
However, not all contributions are included as public support in the numerator of this calculation. This is where the 2% limitation rule becomes critical.
The 2% Limitation Rule
Under Treasury Regulation § 1.170A-9(f)(6), the amount of support from any single donor that can count toward public support is capped at 2% of the organization’s total support for the applicable five-year computation period. Any amount contributed by a single source that exceeds this 2% threshold is excluded from the public support numerator, although it is still included in total support (the denominator). This rule is designed to ensure that public charities truly represent broad community support rather than the interests of a few individuals.
Consider a public charity with $1,000,000 in total support over its five-year computation period. The 2% threshold would be $20,000 (2% × $1,000,000). If a single donor contributed $100,000 during that period, only $20,000 of that gift would count toward public support. The remaining $80,000 would still be included in total support, effectively diluting the organization’s public support percentage.
Why Donor Diversity Matters
Nonprofits sometimes experience rapid growth when a single major donor funds a large portion of the budget. While generous support can be helpful, it can also create unintended compliance risks.
If too much funding consistently comes from one or two sources, the organization may struggle to pass the 33⅓% test due to the 2% limitation. By the time the issue surfaces, the impact may already be embedded in multiple years of the computation period.
To mitigate this risk, a wise long-term strategy includes:
• Building a broad donor base of smaller contributors whose gifts fall under the 2% threshold
• Seeking grants from governmental units and qualifying institutional sources that are exempt from the 2% cap
• Encouraging community participation in fundraising
• Model the five-year public support impact of major gifts before accepting them
The 10% Facts and Circumstances Test: A Safety Net
Organizations that fall below the 33⅓% threshold are not automatically reclassified as private foundations. The IRS provides an alternative: the 10% facts and circumstances test under Treasury Regulation § 1.170A-9(f)(3).
Under this test, an organization that receives at least 10% of its total support from public sources may still qualify as a public charity if it can demonstrate sufficient characteristics of a publicly supported organization. The IRS considers several factors, including whether the organization has a broadly composed governing board, whether it provides services or facilities directly to the public, whether its fundraising program is designed to attract broad-based support, and whether it receives support from a governmental unit or other public charity.
The 10% test is not a safe harbor. It is a judgment-based evaluation, and the IRS retains discretion. However, it provides an important safety net for organizations that narrowly miss the 33⅓% threshold. Organizations relying on this test should maintain thorough documentation of the factors that support their public charity characteristics.
Looking Ahead in the Series
In our previous article, we explored how the IRS measures public support and why it matters for nonprofit classification.
Read it here:
How the IRS Measures Public Support
In the next blog in this series, we will examine the public support test for Related Revenue Entities under Section 509(a)(2) and how earned revenue, program income, and fundraising activities affect public charity status.
Understanding these rules can help nonprofit leaders design funding strategies that protect their public charity status while advancing their organization’s mission.
NOTE: The information contained herein is not intended to be legal advice, and the reader should know that no attorney-client relationship or privilege is formed by the posting or reading of this article, which is also not intended to solicit business.
Casey Summar, Managing Partner
The Law Firm for Non-Profits
1812 W. Burbank Blvd., #7445
Burbank, CA 91506