An organization will lose its public charity status starting in its sixth year of existence if it cannot pass the public support test for two consecutive years. If the organization cannot meet the public support test for two consecutive years, it will be reclassified as a private foundation as of the start of the second consecutive year. In order to avoid unexpectedly losing your public charity classification, you should keep careful track of your public support information through out the year instead of waiting until the end of the tax year when you are preparing your Schedule A.
The organization is still exempt as a 501(c)(3) organization, but it will be subject to the excise taxes that apply to private foundations. It will also file a Form 990-PF, Return of Private Foundation, instead of a Form 990, Return of Organization Exempt from Income Tax.
For 501(c)(3)s, the four main activities that can jeopardize the organization’s tax-exempt status are:
- activity that results in private benefit or inurement;
- lobbying activity, if it constitutes a substantial part of the organization’s overall activities or if it exceeds a predetermined dollar amount;
- any political campaign activity; and
- unrelated business activity that is substantial when compared with the organization’s exempt-function activities.