Q&A #51 – How can a 501(c)(3) organization change its public support test?

Question: I am the Executive Director of a 501(c)(3) organization that was formed about 10 years ago. The IRS determination letter approving our 501(c)(3) status stated that the organization was a public charity under “170(b)(1)(A)(vi).” Our programs and funding sources have shifted over time and our CPA has recently advised us to switch to the “509(a)(2)” test. How do we make this change?

Answer: It is not uncommon for organizations to switch to a different public support test due to evolution in their programs and funding sources. Switching between the 170(b)(1)(A)(vi) test (sometimes also called the 509(a)(1) test) and the 509(a)(2) test can be done simply by checking the appropriate box and filling out the applicable parts in your next Form 990, Schedule A. However, this change will not be reflected in the IRS records or tax-exempt organization database, which may cause some confusion with your grantors or donors if additional steps are not taken.

The instructions for the Form 990, Schedule A make clear that a public charity need not always use the public charity classification shown in its determination letter, and is permitted to switch tests in the Schedule A:

“Check only one of the boxes on lines 1 through 12 to indicate the reason the organization is a public charity for the tax year. The reason can be the same as stated in the organization's tax-exempt determination letter from the IRS ("exemption letter") or subsequent IRS determination letter, or it can be different.”

This is further supported by an example provided in the instructions, which closely matches your organization’s situation:

“Example 2. The organization received an exemption letter that it is a public charity under section 170(b)(1)(A)(vi). For the tax year, it doesn't meet the requirements for public charity status under section 170(b)(1)(A)(vi). Instead, it meets the requirements for public charity status under section 509(a)(2). The organization should check the box on line 10 and complete Part III.”

However, be aware that this change will not be reflected in the IRS records (accessible via irs.gov/teos), so this may cause confusion among grantors or donors (particularly private foundations) who look up the organization to verify its public charity status or rely on the organization’s determination letter. It is possible, but not required, to seek official confirmation that the organization is operating under a different public support test by submitting a Form 8940 (Request for Miscellaneous Determination) to the IRS, although organizations should weigh the time, costs, and benefits of doing so before proceeding.

Planning Tip – A 501(c)(3) organization should always know where it stands with respect to its public support test numbers as they appear on Schedule A of the Form 990, as “tipping” into private foundation status can dramatically impact an organization’s compliance obligations, operations, and ability to fundraise. It is advisable to work through the public support tests with your CPA and/or Form 990 preparer at least annually, and any time there is a significant change to the organization’s sources of funding (for example, if the organization shifts substantially to a fee for service model). Keeping a close eye on these numbers enables an organization to proactively make adjustments as needed to avoid private foundation status.

Lastly, note that there are some cases in which an organization is not permitted change its classification without submitting a Form 8940 and obtaining an IRS determination letter. For example, a private foundation cannot become a public charity unless it submits a Form 8940 requesting reclassification. Additionally, Example 4 from the Schedule A instructions indicate that a supporting organization cannot switch to using the public support test under section 509(a)(2) or, presumably, section 170(b)(1)(A)(vi), would need to first obtain a determination letter.

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