How Donations From Private Foundations Are Different From Donations From Public Charities
Private foundations differ from public charities in several ways. The primary distinction is that a private foundation is a legal entity established for charitable purposes. This organization is independent of government regulation. Typically, the funding for a private foundation is provided by one or more individuals, families, or corporations.
The main advantage of a private foundation is that donors are able to choose the charities they want to support. A private foundation can be a family foundation, or it can be a nonprofit, tax-exempt organization that operates solely for charitable purposes. In either case, the assets the foundation holds are not subject to estate taxes.
Donors can receive an income tax deduction for contributions to a private foundation. The amount is based on the adjusted gross income of the donor. However, limits can apply. Depending on the nature of the property contributed, the amount of the donation may be limited. If the donation exceeds the limit, donations can be carried over to subsequent years.
In general, donors are able to receive an income tax deduction of up to 30% of their AGI. Donors can contribute publicly traded stock, or certain privately held securities. Other non-publicly traded assets may be deductible if they are deducted at the fair market value of the asset. There is also a special rule that applies to appreciated nonstock property. For example, if a donor donates a nonstock asset that has appreciated, the donor is entitled to an income tax deduction for its fair market value, rather than its original cost.
Donors are required to file annual tax returns for their private foundation. These tax returns list all the donors and addresses for donations over $5,000. Generally, these forms are filed with the IRS. It is also important to note that a private foundation must make charitable distributions throughout the taxable year.
The major differences between public and private foundations relate to the contribution limits, minimum distribution requirements, and public scrutiny. Unlike public charities, private foundations can receive cash donations from outside sources, but donors cannot appoint their own members to the board of directors. Some private foundations prefer to outsource administrative and staffing needs. Also, many private foundations are set up in perpetuity, so that there is no need to re-evaluate the foundation every few years.
There are many reasons to choose a private foundation. One of the biggest benefits is the flexibility in grant making and investment management. Private foundations are able to invest in for-profit businesses, as well as make program-related investments. Because private foundations can generate profits through their investments, they are able to make grants to other charities.
Private foundations are also subject to excise taxes. Most private foundations are required to pay a 1-2% excise tax on their net investment income. They are also required to distribute 5% of their net investment assets in the form of grants to other organizations. While there are no limits on the total amount of funds that can be donated, the amount of the grant must be equal to or less than 85% of their net investment income.