Private Foundations Versus Public Charities

Posted on Wednesday, November 08, 2023

Under the tax law, a 501(c)(3) organization is presumed to be a private foundation unless it qualifies as a public charity.  Private foundations and public charities have some similarities; however, there are also significant differences and requirements that each must follow.

It is important that you know the charity status of your organization so that you can make sure you are following all requirements. 

Control

Public charities are primarily supported by the public and governed by an independent board of directors.  They are normally subject to more public scrutiny.  Private foundations are normally run by a family or small group of individuals.  Because private foundations have less interaction with the public, they have more rules to follow.  

Minimum Distributions

Most private foundations are nonoperating which means they support the programming of other nonprofits through grants.  As a result, private nonoperating foundations must distribute a certain % of their assets each year in qualifying distributions.  Public charities have no such distribution requirement.  

Self-Dealing

Private foundations are prohibited from engaging in certain transactions with disqualified persons.  Disqualified persons are those who have substantial influence over the organization (i.e. officers, board members, founders, etc.).  Public charities are less stringent with these types of transactions but have some restrictions.

Political Activity

Neither private foundations nor public charities are allowed to participate in political activity.  Political activity is defined as any activity that supports or opposes a candidate for political activity.  Public charities are also allowed to engage in limited lobby activities which is defined as intending to influence foreign, national, state, or local legislation.  Private foundations are not allowed to lobby.

Taxes

Private foundations are subject to excise taxes on activities such as self-dealing and failure to make the minimum required distribution.  They are also subject to a 1.39% excise tax on net investment income.  Public charities are not normally subject to either tax.

Annual IRS Filings

Private foundations must file Form 990-PF, Return of Private Foundation with the IRS on an annual basis.  A copy must also be filed with the State Attorney General.  Depending on the type of organization, its revenue, and assets, public charities are required to file Form 990-N,  Annual Electronic Filing Requirement for Small Exempt Organizations, Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, or Form 990, Return of Organization Exempt From Income Tax.

Donors

Private foundations receive their support from a single source or a small number of donors.  Public charities receive their support from a wide variety of donors – governments, private foundations, corporations, and the general public.  The names and addresses of donors to private foundations that give $5,000 or more are reported on Form 990-PF and are made available to the public.  Certain donors’ names and addresses that give to public charities are reported to the IRS but are not made available to the public.  This may cause donors to be more hesitant to give to private foundations.

Those organizations that are considered public charities must meet a public support test each year as part of Form 990 (Schedule A) filed with the IRS.  At least 33 1/3% of an organization’s total support must come from the general public to maintain its public charity status.  If it fails to meet the test it loses its public charity status and reverts to private foundation status.  Most public charities do not want to become private foundations.  To maintain your public charity status, make sure you know where your support is coming from and your public support percentage.

Contributed by: Carrie Minnich, MAcct, CPA | Partner | DWD CPAs & Advisors

Posted in Mission Minded Nonprofits

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