Passing the Public Support Test: Challenges of Equivalency Determination

April 23, 2024
CAF America's Grantmaking Fundamentals

Equivalency determination (ED) is the process by which a U.S. grantmaker makes a good faith determination that a foreign grantee is considered the equivalent of a U.S. public charity under IRS Sections 501(c)(3) and 509(a)(4) of the tax code.

One of these requirements is that the entity is “supported by the general public.” In real terms, the IRS uses what is called the “public support test” to evaluate the level of funding coming from multiple donors. The test works as follows:

  • The charity must calculate the amount equivalent to 2% of its income from public sources for the past 5 years (or equivalent fiscal reporting period)
  • The charity must list its biggest donors from each of the past 5 years, in decreasing size order, and the percentage of each year’s income derived from those donors.
  • For each donor, any amount of support that exceeds the 2% number in each respective year must be subtracted from its total calculated income from public sources.
  • The resulting number is considered the charity’s level of public support, and when divided by the total income of the organization provides a percentage of public support.

If the resulting percentage is 33% or more of each of the prior five years of income, the organization is determined to have passed the test.

Consider the hypothetical examples below, for two charities (A & B) that both have annual incomes of $1,000,000 from different patterns of donors. Since both charities have the same total income, they have the same 2% upper limit for calculating public support: $20,000 per donor.

Charity A

Charity A has a large number of small donors but has a few major gift donors that contribute to the vast majority of its annual operating budget. This includes a single private foundation that provides a full 50% of its budget each year to support a specific program that aligns with a strategic pillar of the foundation’s founder.


Charity B

Charity B has a much larger list of ‘small’ donors, but their average gift is closer to $5,000 and together they make up a larger share of the charity’s income as compared to Charity A. A relatively smaller list of major gift donors also means that the organization is much less reliant on a small number of key funders.


How much public support do they have?

The amount of public support for Charity A is calculated as $1,000,000 – $825,000 = $175,000, or 17.5%. As this is less than 33%, Charity A cannot be considered publicly supported and would not pass an Equivalency Determination review.

The amount of support for Charity B is calculated as $1,000,000 – $115,000 = $885,000, or 88.5%. As this is more than 33%, Charity B can be considered publicly supported and if all other requirements are met would pass an Equivalency Determination review.

Note that this example is simplified to one fiscal reporting period for demonstration purposes. A full public support test requires the same calculation for the past five years, supported by five years of detailed financial reporting.

See specific instructions on the public support test for U.S. entities here.

Additional considerations for the public support test include:

  • All government grants and grants from other publicly supported organizations (including DAF sponsors like CAF America), may be considered public support and are NOT subject to the 2% limit.
  • If the levels of public support are below 33%, the grantmaker can collect a further set of information to support a “Facts & Circumstances” test that may be used to approve an ED without the required public support. This is meant as a tool to explain any temporary changes to a charity’s financial situation; for example, to ensure that a one-time transformational gift that skews calculations does not preclude the organization from qualifying for a further five years. This does not guarantee approval and it requires ongoing monitoring in future ED reviews if the charity applies for a renewed certificate. The issuer of the ED (the attorney or qualified tax practitioner reviewing the affidavit) has discretion over whether to accept the Facts and Circumstances when approving the file.

For many charities, an equivalency determination is a powerful tool to access funding from U.S. foundations. But it is a time-intensive and context-specific process that may not work for all grantees.

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