Mission: Accountable » private foundation

The Differences between a Public Charity and a Private Foundation

Becky DaVee — Tue, 26 May 2009 15:08:28 +0000

Organizations that are organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, foster national or international amateur sports competitions, or for the prevention of cruelty to children or animals are eligible to be exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code. Unless the organization is a church, or a related-type entity, or the organization has annual gross receipts less $5,000, the organization is required to file Form 1023 with the IRS. These charitable organizations must be organized and operated exclusively for one or more exempt purposes (as listed above).

Based on Form 1023, the IRS will classify the entity as either a public or private charity. What are the major differences?

A public charity has a broad base of support (contributions typically exceeding 33 1/3% of total support). A private charity has a small base of public support and the majority of the support is derived primarily from the investment earnings of the organization. For recent legislative information for private foundations, see this post.

So what type of organization are you? Look at the composition of the organization’s support.

Applying for Exempt Status

Becky DaVee — Mon, 18 May 2009 15:54:02 +0000

Entities that are organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes may be eligible for federal income tax exemption. What does exempt from federal income tax mean? The organization does not pay federal income tax on the net earnings of the operation. An organization that has applied and received their exemption under Code 501(c)(3) may be receive charitable contributions that are tax deductible by the donor.

So how does an organization receive exempt status?

There are two requirements for exemption - organized and operated exclusively for one or more exempt purposes (see the list above). Churches including synagogues, temples, mosques, integrates auxiliaries of churches, conventions/associations of churches and organizations that have less than $5,000 in gross receipts do not have to file the application with the IRS. This application is referred to as Form 1023 and it is due within 27 months after the end of the month in which the organization was legally formed.

Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, requests alot of information about the operations (planned income; fundraising, grantmaking, political, lobbying and foreign activities) and organizational structure (board composition/related businesses; compensation and conflict of interest policies). You will be required to file a copy of the organization’s certificate of formation, bylaws and conflict of interest policy, if applicable, with the form.

Based on the planned operations, the organization will either be classified as a public charity or a private foundation. As a public charity, the organization has a broad support base and is predominately supported by public contributions. As a private foundation, the operations are supported predominately from the investment earnings and a small number of donors. There are different reporting requirements depending upon the classification. The IRS will determine the classification.

Depending on the complexity of your organization’s application, the IRS may have additional questions and require clarification. So be prepared to respond and be patient. For more information on Form 1023, see the IRS website or Form 1023 instructions.

Possible Change in Private Foundation Tax Rates

Kelly Hein — Thu, 26 Mar 2009 03:15:26 +0000

Senators Schumer, Levin and Stabenow announced today they’ve introduced legislation to simplify the excise tax that applies to private foundations (PFs). In place of the current two-tiered system (1%/2%), the bill would institute a single tax rate. Based on a study by the Council on Michigan Foundations, a tax rate of 1.32% for all PFs would result in no net change in the total excise tax collected from PFs.

The Senators expect their revision would spur increased distributions from PFs to public charities. Under the current system, a PF pays the 1% tax in years where its distributions as a percentage of its asset base exceed the 5-year weighted average of distributions to asset base. Thus, a PF can manage its tax liability by making small incremental increases in its giving level.

Conversely, when a PF has a significantly higher distribution percentage in a given year (for instance, following Hurricane Katrina), the PF will be penalized in future years by the increase in the 5-year weighted average, unless they continue with the new higher distribution percentage. The proposed legislation would free PFs from deciding between a desired contribution and their future tax bills.

If you have questions about the proposed legislation, contact us.

Is a Private Foundation right for me?

Kelly Hein — Sat, 07 Feb 2009 19:39:33 +0000

Situation: You are interested in setting aside a pool of assets for use in current and future charitable giving. You aren’t certain to whom contributions will be made. You would like to receive a tax deduction for the funds you set aside. How can you accomplish your objectives?

Short Answer: A private foundation (PF) or a donor advised fund (DAF).

Question: Which one should I choose?

Deeper Answer: It depends.

Both a PF and a DAF meet the primary objective of generating a charitable deduction in the year of transfer, even though no funds may actually reach a charitable organization that puts those funds to use in their particular charitable endeavor. There is one primary reason that a PF may make sense for a donor – control. The donor of a PF will determine the initial members of the foundation’s board, and usually serves on the board. The board controls the ultimate distribution of funds to outside charities and controls the selection of all investments made by the PF. With a DAF, the donor can recommend charities to receive disbursements of funds, but the final decision rests with the management of the DAF. Also, depending on the DAF, available investment choices may not allow for investments that meet the donor’s wishes.

For assistance in determining your best alternative, contact us.