Even if you’re familiar with nonprofits, you might not know exactly what constitutes a 509(a)(1) public charity.
In this post, you’ll learn what a 509a1 is as well as what sets it apart from other types of tax-exempt organizations. We’ll also cover some examples of various 509a1 charities as well as the difference between a 501c3 and 509a1. Finally, you’ll read about how to determine whether your organization might qualify for 509a1 status. Let’s have a quick look –
- What is a 509(a)(1)?
- 501(c)(3) vs. 509(a)(1): What’s the Difference?
- What is the “Public Support Test” for a Public Charity?
- Examples of 509(a)(1) Sources of “Public Support”
- Types of Organizations Exempt Under Section 509(a)(1)
- 509(a)(1) Facts and Circumstances Test
Strengthening your knowledge of various types of nonprofits can help you advance in the field, as well as help you start or grow your own nonprofit. Read on to better understand what a 509(a)(1) public charity is and why it matters.
1. What is a 509(a)(1)?
A 509a1 is a charity that exists for public benefit and is primarily supported by the public (either by the government or by the general public). Logically, a 509a1 organization is tax-exempt under Section 509(a)(1) of the IRS code. These public charities are also a subset of organizations categorized under Section 501(c)(3) of the IRS (more on this in the section below).
Most commonly, a 509a1 public charity refers to a church, school, or hospital. There are also other types of 509a1 organizations – including conventions or associations of churches, medical research organizations. Organizations that provide support for a state college or university and governmental units of the United States also fall in this criteria.
Pro Tip: Read more about how the IRS defines which types of organizations may qualify for 509(a)(1) status. At 200+ pages, the IRS’s guide is dense – but you can search it using Ctrl + F to find the topic you’re interested in.
2. 501(c)(3) vs. 509(a)(1): What’s the Difference?
Simply put, a 509a1 is a specific type of 501c3. The IRS notes that 501(c)(3) organizations are either private foundations or public charities. A 509(a)(1) is one type of public charity.
For a 501c3 to qualify as a 509a1, it must meet certain criteria. As noted above, a 509(a)(1) nonprofit must exist to serve the public and must primarily be funded by the public. The IRS also has a “Public Support Test” that you can use to calculate whether an organization is “primarily funded by the public”. More on this below.
Refresher: What is a 501(c)(3)?
A 501(c)(3), often referred to as a charitable organization, is one that meets the criteria set forth in Section 501c3 of the IRS code. There are specific rules regarding how a 501c3 is structured, what types of activities 501c3 organizations are permitted to engage in, and ongoing compliance requirements to be mindful of.
Pro tip: Check out our complete guide to starting and registering a 501c3 organization.
3. What is the “Public Support Test” for a Public Charity?
As discussed, the IRS requires a 509(a)(1) organization to be primarily funded by the public, whether through governmental support or the general public. But, what does “primarily funded” mean, exactly? The IRS has a “Public Support Test” to determine whether an organization has a broad enough base of support to be considered a public charity.
This test requires calculating what percentage of an organization’s revenue comes from public support, as measured over a five-year period. The five years included in the computation should end on the last day of the organization’s most recently concluded fiscal year.
You can find an organization’s public support ratio on its Form 990, a publicly viewable document that each 501c3 is required to file each year with the IRS.
3.1 509(a)(1) Public Support Test
The 509(a)(1) test requires that the organization receive at least 1/3 of its support from contributions from the general public. This can include governmental agencies, contributions from the general public, and contributions or grants from other public charities.
Alternatively, the organization must meet the 10 percent facts and circumstances test (more on this below). In other words, your nonprofit must be able to establish that, under all the facts and circumstances, it normally receives a substantial part of its support from governmental units or the general public.
3.2 509(a)(2) Public Support Test
A 501(a)(2) organization is similar to a 509(a)(1), except that it can also be supported by “exempt function income”. This refers to income that the organization earns from activities related to its tax-exempt purposes.
Generally, the 509(a)(2) test requires that the organization receive more than 1/3 of its support from contributions from the general public and/or income from activities related to its tax-exempt purposes. Under the 509(a)(2) test, an organization can receive no more than 1/3 of its support from gross investment income and unrelated business taxable income.
4. Examples of 509(a)(1) Sources of “Public Support”
When thinking about the public support test described above, it’s important to understand how the IRS defines “public support”. Then, you can calculate public support as a percentage of an organization’s total support.
Total support includes the following:
- Gifts, grants, contributions, and certain membership fees
- Net income from unrelated business activities
- Gross investment income
- Tax revenues levied for the benefit of an organization and either paid to or expended on behalf of the organization
- The value of services or facilities (exclusive of services or facilities furnished to the public without charge) furnished by a governmental unit to the organization without charge
Pro tip: view the IRS guidelines for a complete list of what to consider when calculating your total support.
Public support of a 509(a)(1) is more narrowly defined. However, just as it sounds, this support must come from the public.
“Public support” can include a combination of the following:
- Donations from the general public – including an individual, trust/foundation, and/or corporation
- Support from governmental funding agencies and other governmental sources
- Contributions made by other publicly supported organizations
It’s important to note that donations from the general public can be “public support” as long as they do not exceed 2% of the organization’s total support for the specific period. Although, funds from governmental sources and other public charities are not subject to this limitation.
5. Types of Organizations Exempt under Section 509(a)(1)
There are several types of organizations that can qualify as exempt under Section 509a1. As mentioned above, some of the most common types that might come to mind if you’re familiar with 509a1 organizations are churches, schools, and hospitals.
The IRS shares a list of organizations that can be classified as 509a1 public charities. These include:
- Churches, conventions of churches, and associations of churches
- Educational organizations that provide formal instruction and maintain a faculty and curriculum as well as an enrolled body of students. This can include private schools, colleges, and universities, as long as they operate in accordance with a racial nondiscrimination policy.
- Hospitals. This may include institutions like rehab centers, outpatient clinics, and community mental health centers if their primary purpose is providing medical care.
- Medical research organizations that work in conjunction with a nonprofit hospital or governmental unit.
- Endowment funds organized and operated in connection with state and municipal colleges and universities.
- Governmental units of the United States.
6. 509(a)(1) Facts and Circumstances Test
As discussed, a 509(a)(1) organization must meet the “Public Support Test.” Essentially, this test means that a public charity must receive at least 1/3 of its total support from public sources.
Alternatively, if the organization does not meet this test, then it must meet the 10 percent facts and circumstances test.
To pass the “facts and circumstances” test, a 509a1 nonprofit must:
- Receive at least 10% of its total support from public sources
- Be organized and operated in such a way as to attract new and additional public or governmental support on a continuing basis
- Meet enough of the “facts and circumstances” outlined in IRS Reg. 1.170A-9(e)(3) to indicate that it is normally publicly supported.
But what are those “facts and circumstances,” exactly? The IRS also outlines each factor they consider.
6.1 Percentage of Public Support
The IRS also notes that the higher the percentage of public support, the less information an organization may need to provide to justify its 509a1 status – and vice versa.
Additionally, the IRS may consider whether an organization receives a significant part of its funds from a public charity or governmental agency to which it is in some way accountable.
6.2 Broad Base of Supporters
One way to show that an organization is publicly supported is to demonstrate a broad base of support. For example, does the organization receive donations from members of a single-family, or people from throughout the community? The IRS notes that when considering this information, they will take into account the type of organization, how long it has been around, and whether its activities are niche and inherently attract a smaller donor community. This is because narrowly-focused and newer organizations logically tend to have smaller, more narrowly-defined donor pools.
6.3 A Governing Body that Reflects Public Interests
Having a representative governing body that represents the broad interests of the public can also help make the case to show that a 509a1 passes the facts and circumstances test. This includes public officials, community and business leaders, and people who are elected by a broadly-based membership.
6.4 Public Participation in Program or Policies
The IRS may consider whether community leaders participate in or sponsor an organization’s activities. These may include people with special knowledge or expertise, elected officials, civic and corporate leaders, etc.
6.5 Public Benefit to Society
An organization may strengthen its case under the facts and circumstances test if it makes its facilities available to the public on an ongoing basis. For example:
- A library or museum that is open to the public
- A symphony that gives public performances
- An elderly care home that provides bed care and nursing services to the public
- An educational or research institution that regularly publishes scholarly journals or studies for public consumption
Additionally, the IRS will consider whether an organization maintains a definitive program to accomplish its charitable work in the community (for example, developing employment opportunities).
6.7 Additional Factors for Membership Organizations
For membership organizations, the IRS considers whether the nonprofit’s solicitations are to enroll a substantial number of members in the community. For example, are individual memberships or dues affordable for a broad cross-section of the general public? Are the organization’s activities likely to appeal to people with a broad common interest or purpose?
For an organization to share information about the applicable factors listed above, fill out section VI of a Schedule A form.
As you can see, establishing a 509(a)(1) organization requires meeting specific requirements set forth by the IRS. These publicly-funded organizations can be found all across the U.S. enriching the communities in which they serve. And, by expanding your knowledge of this type of organization, you’re also helping to enrich your own nonprofit knowledge and strengthen our industry as a whole.
Learn more nonprofit management tips and resources on our nonprofit blog.