Private Foundation or Charity? Cracking the "Code" on 501(c)(3) Organizations

If you have been involved in the not-for-profit sector, particularly that subsect of the industry involving federally tax-exempt organizations under 501(c)(3) of the Internal Revenue Code, then you have probably come across well-intentioned colleagues using the words "foundation" and "public charity" interchangeably. The fact of the matter is that while all organizations qualifying for federal tax-exempt status under 501(c)(3) are categorized as either private foundations or public charities, there are significant differences between the two. Generally speaking, public charity status is considered to be most preferential.

So what makes private foundation status so relatively disadvantageous compared to public charity status? In a nutshell, private foundations are subject to additional operating requirements by the IRS, and excise taxes for failing to meeting internal revenue mandates. For instance, unlike public charities, private foundations are required to annually distribute a percentage of income for charitable purposes or face penalties from the IRS for failing to do so. In contrast, public charities have no such requirement.

Moreover, from an annual reporting perspective, private foundations are required to file a Form 990-PF regardless of the amount of gross revenue the foundation takes in over the course of the tax year. The Form 990-PF is lengthy, labor intensive and costly to prepare. On the other hand, public charities with moderate annual gross revenues need only file annual returns such as the simple e-file informational 990-N return, or the short-form Form 990-EZ, both of which are significantly less costly and involved than the Form 990-PF.

Perhaps most significant, however, is the fact that donations to private foundations are given lower permissible tax deductibility limits than similar gifts to public charities. Donors making gifts to public charities may maximize their deductions upwards of 50% of contribution base, contrasted with a maximum of 30% for donations to private foundations.

Taking into account all of the additional operating requirements and lower donor deductibility, it becomes clear why understanding the differences between public charities and private foundations is essential.

For more information on this topic or for counsel on other nonprofit organizations or business matters, contact Attorney Benjamin L. Rackliffe at 401.824.5100 or email brackliffe@pldolaw.com. We welcome your comments and suggestions.

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