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private foundation and a public charity

What is the difference between a private foundation and a public charity?

MCKENZIE HASSE, Senior accountant

 

The Internal Revenue Service (IRS) has made it possible for charitable organizations to be formed that are free from federal income taxes. These organizations present themselves in one of two different ways: as private foundations or as public charitable organizations. In this blog we outline the purpose of each and the significant differences between the two.

 

Private Foundations

The term “private foundation” refers to a philanthropic organization that is normally established by a single donor, who is typically a person or a corporation. An investment is made with an initial seed gift, which is subsequently distributed in accordance with the aims of the organization. The scope of these goals must be consistent with Section 501(c)(3) of the Internal Revenue Code, and it should encompass such areas as poverty assistance, educational progress, the prevention of community degradation, among other things. Private foundations, as opposed to public charities, often offer grants to people or other charitable organizations rather than directly supporting their own projects.

The endowment structure of private foundations offers a constant, stable, and dependable source of ongoing income for the organization. This is critical since it allows for more confident decision-making when it comes to budgeting and finance. In addition, the donor typically receives a tax deduction for their donation.

The primary source of criticism against private foundations is their lack of operational independence. Because of their private financing source, they are able to disregard public opinion. Moreover, they may produce less-than-optimal results if they do not have the guiding effect of the market to direct their efforts. Private foundations are also required to complete extra paperwork (to guarantee that funds are used appropriately) and to meet minimum asset distribution standards, among other things (5 percent each year).

 

Public Charitable Organizations

Some people may regard public charities to be more attractive than private foundations, since they are required to collect contributions from the public on a routine basis. As a result, they must appeal to public opinion.

To qualify as a charitable organization, the Internal Revenue Service states that the minimum one-third of its donations come from the general public, or that the charity fulfills the 10 percent facts and circumstances test. As a result, unlike private foundations, the public charity uses the cash raised by the general public to directly support its efforts.

 

Significant Differences

The way in which the entity collects and distributes funds is the biggest differentiator between the two scenarios. Other differentiators include how each organization is controlled and taxed.

Public Charity

Since a public charity solicits gifts from the general public regularly, it is possible to calculate the quantitative degree of public support that is required to qualify as such. In terms of taxation, public charities often have larger donor tax-deductible contribution limits, as well as the opportunity to solicit assistance from different public charities and private organizations, compared to private foundations.

A public charity is advantageous in the fact that individual donors have the freedom to give or donate as much or little as they like. Customized tax plans that are suited to individual preferences may be created in this way.

Private Foundation

It is common for the establishment of a foundation to need a bigger initial financial commitment, both to fund the foundation’s operations and to cover legal expenses. A minimum of 30% of your pre-tax earnings should be sent to the organization to maximize your income tax benefit. Regular payments may save a person up to 46 percent on his or her estate taxes, with any surplus being permitted to “carry over” for a period of up to five years after the death of the contributor.

The most significant advantage of running a foundation is the degree of control that can be exercised. The person in charge of operating the foundation has the authority to select who or what should be supported, as well as to make investment choices. The bottom line is that both are effective vehicles for delivering philanthropic services, and the distinctions are measured in inches rather than kilometers.

 

Special considerations

If you are looking to get the biggest net profit from your tax-deductible contributions, consider donating to a public charity. On the other hand, if you intend to leave a legacy, possess a large sum of money (for example, through an inheritance), or have a very valuable estate that you’d like to keep out of the hands of the government, a private foundation may be of assistance. For more information, feel free to contact us or visit our website to learn more about our accounting services.

ABOUT THE AUTHOR

McKenzie Bruce

402.778.7965

mhasse@lutz.us

LINKEDIN

MCKENZIE HASSE + SENIOR ACCOUNTANT

McKenzie Hasse is a Senior Accountant at Lutz with over three years of experience. She provides tax planning and compliance services for clients with a focus on preparing individual and business income tax returns.

AREAS OF FOCUS
  • Tax
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Association of Certified Public Accountants, Member
  • Certified Public Accountant
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, University of Nebraska, Omaha, NE

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