guest post // Increasing Public Support: 3 Steps to Meet IRS Requirements
By Greg McRay, Foundation Group
From personalizing donor outreach to improving sustainer programs, nonprofits like yours constantly seek ways to acquire and retain donor support. After all, donor generosity is the driving force behind your nonprofit’s operations, allowing you to reach key mission milestones and increase your impact on the community.
For organizations classified as public charities, maintaining strong public support is the key to financial sustainability and compliance with IRS requirements. In this quick guide, we’ll break down three practical steps your organization can take to pass the public support test. But first, let’s take a closer look at the IRS’s standard and what it means for nonprofits.
What is the public support requirement for nonprofits?
The IRS defines publicly supported charities as organizations that receive a substantial portion of donations from “publicly supported organizations, governmental units, and/or the general public.” The public support test is the rule that quantifies this standard—at least one-third of donations must be given by supporters who provide less than 2% of the organization’s overall donations.
In other words, your public support percentage equals your organization’s total public contributions (from donors who give less than 2%) divided by the total support your organization receives, multiplied by 100 to get a percentage.
For example, let’s say you run a public charity that provides educational resources to underserved communities. Over the past five fiscal years, your organization has brought in $600,000 in donations. In this scenario, imagine $350,000 comes from donors giving less than 2% each. Here’s how the math breaks down:
Total donor support: $600,000
Minimum public support needed: 33.3% of donations, or $200,000
Total public contributions under 2%: $350,000
Public support percentage: 58.3%
A public support percentage greater than 33.3% reflects your organization’s ability to engage donors and its overall appeal, meaning this calculation is an essential measurement for determining your nonprofit’s effectiveness.
What happens when a nonprofit fails the public support test?
Failing to pass the public support test for two consecutive years has significant repercussions. Namely, it can result in losing your public charity designation and instead being classified as a private foundation. This comes with the following limitations:
You must file Form 990-PF each year.
You will become subject to excise taxes.
You will not be able to regain public charity status for five years.
3 steps to increase public support
1. Foster financial transparency
Unless donors place restrictions on their donations to your nonprofit, you may use their contributions however you please. They must trust that you’ll use their funds to further your mission and make a difference, as you likely promised in your donation appeals.
To prove that their contributions are being used wisely, be transparent about your nonprofit’s finances with these best practices:
Publish annual reports: Summarize your nonprofit’s yearly activities and accomplishments in a branded report. Double the Donation’s guide to annual reports recommends making it a downloadable resource on your nonprofit’s website so it’s accessible to all donors—both current and potential.
Outline how funds are earned and used toward your mission: Clearly explaining how your nonprofit raises and spends donations is a crucial donor appreciation tactic because it shows the impact supporters have on your mission. This practice also reassures donors that you use their funds as they’d want you to, whether that’s by directly serving beneficiaries or maintaining your organization’s operations.
Make key financial documents available: Provide a transparent view of your nonprofit’s financial health by allowing donors to view audited financial statements and your nonprofit’s Form 990. While you can make these documents publicly available, some nonprofits choose to provide them only upon request.
When sharing key documents or details about your nonprofit’s financial activities, provide any contextual information that might be needed to interpret the data. For example, a sharp increase in administrative expenses may be alarming to donors unless you explain that you’ve recently invested in fundraising software to reach more potential donors and accept payments securely.
2. Maintain open communication
Open communication is the key to fostering trust, as it enhances your nonprofit’s credibility and encourages ongoing support. Here are a few ways to practice open communication:
Keep stakeholders informed: Openness about all your nonprofit’s activities—including the good and the bad—demonstrates honesty and trustworthiness. As Foundation Group explains, transparency about your slip-ups reassures donors that “your nonprofit is looking out for their best interests and… they can trust you to keep them in the loop.”
Make board meeting minutes publicly available: Share minutes from board meetings to provide insight into your organizational governance and decision-making process. Prospective donors who can see the “why” behind your nonprofit’s activities will be more likely to give their support.
Give a behind-the-scenes look at your operations: Answer donors’ burning questions about how your nonprofit works by allowing them to see your day-to-day operations, staff activities, and other typical tasks. Consider offering tours of your facilities or hosting Q&A sessions to share this information.
By providing a clear understanding of how your organization works, you’ll create a strong case for support that encourages more of the general public to get on board.
3. Work with a professional bookkeeper
Recruiting a professional to oversee your nonprofit’s recordkeeping demonstrates an effort to maintain accountability in your financial activities and earn your donors’ trust. Work with an expert bookkeeper to:
Categorize and record transactions
Reconcile bank statements
Produce financial statements
Receive compliance advice and counsel
Hiring a professional bookkeeper instills confidence in donors that their contributions are well-managed. As a result, the general public will be more inclined to give their support. Plus, your nonprofit will directly benefit from the professional services and advice an experienced bookkeeper provides.
Increasing public support is crucial for funding your operations and complying with the IRS’s regulations. Your nonprofit must focus on laying a strong foundation of trust and accountability to secure support from the general public. Consult a professional in nonprofit finances to learn more about calculating your organization’s public support percentage and ensure you meet the standard to remain compliant.
This guest post was written by Greg McRay.
Greg is the founder and CEO of Foundation Group, one of the nation's top providers of tax and compliance services to nonprofits. Greg and his team have worked with tens of thousands of nonprofits for over 25 years, assisting them with formation of new charities, plus tax, bookkeeping, and compliance services. He is credentialed as an Enrolled Agent, the highest designation of tax specialist recognized by the Internal Revenue Service. Based in Nashville, Tennessee, Greg and company work with charities and nonprofits all across the country and worldwide.