What is The Difference Between a Public Charity and a Private Foundation?

If you listen to public radio, you have probably heard an announcement that programming is supported by an organization such as the Jane Doe Private Foundation or the Smith Family Foundation. If, on the other hand, you have personally made a donation to support public radio, you have donated to a public charity. What is the difference between a private foundation and a public charity? This article will discuss the similarities and  differences between  the two.

To begin, you can’t tell the difference between a public charity and a private foundation by looking at the organization’s name. There is no prohibition against a public charity calling itself a foundation. The Saintly Foundation can be either a public charity or a private foundation, and it’s a good idea to know which one it is before you make donations. You can deduct a higher percentage of your income for donations to public charities than you can for donations to private foundations.

Both public charities and private foundations are types of nonprofit organizations recognized by the IRS under Internal Revenue Code 501(c)(3). As indicated above, a tax deduction is allowed for donations to both public charities and private foundations for taxpayers who itemize deductions on their tax returns. Both types of organizations engage in providing some sort of public good, and both are exempt from federal income tax. (As an aside, just because an organization is recognized as a nonprofit doesn’t mean that the organization’s books are always in the red. Nonprofits can and do spend less than they take in. The nonprofit designation refers to the motive for running the business, which is providing a societal benefit, rather than making a profit.)

While there are similarities, public charities and private foundations differ significantly in the way they are funded, how they are governed, how they operate, and the way they report their activities to the IRS.

Funding

• Public charities must receive their financial support from a wide variety of sources, including gifts from the general public, and grants from governmental entities, corporations, or other nonprofit organizations. Public charities are subject to an IRS public support test that requires a minimum percentage of the organization’s financial support come from a broad base of public donations. 
• Private foundations are usually funded by a single individual, family, or trust. They can be funded by an endowment from a single person or small group of donors. Private foundations are not subject to the public support test.

Governance

• Public charities are governed by a board of directors that should be representative of the community they serve. A majority of the board members should be independent from each other and the organization.
• Private foundations are also governed by boards, but the board can consist of the donors themselves or by individuals chosen by the donors. This gives the donors a great degree of control over how the organization operates.

Operations

• Public charities conduct charitable activities or provide services directly to the public. Their primary purpose is generally to serve individuals or a defined group of individuals.
• Private foundations usually make grants to other charitable organizations to support their work. Private operating foundations can conduct their own charitable activities, but in general, private foundations support other charities.

Reporting

• Public charities must file an annual return with the IRS using Form 990, 990-EZ, or 990-N. For organizations filing Form 990 or 990-EZ, the public support test is part of the annual return. Public charities are not required to distribute a minimum amount of their assets or spend all their income on their programs each year.
• Private foundations are required to file Form 990-PF. They must distribute a minimum of 5 percent of their net investment assets annually for charitable purposes. Private foundations are also required to pay an excise tax of 1.39 percent of their annual net investment income.

Differences in deductibility of donations

• In general, individuals making contributions to public charities can take tax deductions of up to 60 percent of their adjusted gross income (AGI) for cash donations, and up to 30 percent for most non-cash donations. As with anything having to do with taxation, exceptions apply, and these percentage limitation provisions will most likely change this year. Still, the percentage limitation for cash donations to public charities will not likely fall below 50 percent.
• Individuals making donations to private foundations are generally limited to deductions of 30 percent of their AGI for cash donations and 20 percent for long-term appreciated publicly traded securities.

Let us know if you have any questions or want more information about public charities or private foundations. Our tax and assurance teams have an amazing body of knowledge about all types of nonprofits, and we would love to share with you.