Private foundations and tax rules

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Q. What constitutes a “private foundation” as ineligible for a direct donation for tax avoidance?
— Possible donor

A. So you want to save on taxes. And you want to give to a private foundation rather than a public charity.

The rules are a little complex.

First, here’s what the Council on Foundations says:

“Contributions made to public and private foundations may be deducted from the donor’s federal income tax if the donor is an individual or corporation. The amount of the deduction is subject to certain limits under federal tax law.

“Generally, gifts to public charities receive more favorable tax treatment than gifts to private foundations. For example, charitable cash donations are deductible at up to 50 percent of the taxpayer’s adjusted gross income (AGI) when given to public charities, but the same gift to a private foundation is deductible at a rate of only 30 percent of AGI.”

And of course, the IRS has a lot to say:

“The 50 percent limitation applies to (1) all public charities (code PC), (2) all private operating foundations (code POF), (3) certain private foundations that distribute the contributions they receive to public charities and private operating foundations within 2‐1/2 months following the year of receipt, and (4) certain private foundations the contributions to which are pooled in a common fund and the income and corpus of which are paid to public charities.

“The 30 percent limitation applies to private foundations (code PF), other than those previously mentioned that qualify for a 50 percent limitation, and to other organizations described in section 170(c) that do not qualify for the 50 percent limitation, such as domestic fraternal societies (code LODGE).

“A special limitation applies to certain gifts of long‐term capital gain property. A discussion of that special limitation may be found in Publication 526, Charitable Contributions.”

Any amount not deducted in the year a contribution is made may be carried forward and taken in up to five years, said Abby Rosen, a certified financial planner with RegentAtlantic in Morristown.

Rosen said your donation may also be limited if your AGI is more than $155,650 if married filing separately, $259,400 if single, $285,350 if head of household, or $311,300 if married filing jointly or qualifying widow(er).

The important question to answer next is: What’s the difference between a private foundation and private operating foundation?

According to the IRS, Rosen said, “every organization that qualifies for tax exemption as an organization described in section 501(c)(3) is a private foundation unless it falls into one of the categories specifically excluded from the definition of that term (referred to in section 509(a)). In addition, certain nonexempt charitable trusts are also treated as private foundations. Organizations that fall into the excluded categories are institutions such as hospitals or universities and those that generally have broad public support or actively function in a supporting relationship to such organizations.”

She said there are also several restrictions and requirements on private foundations, including:

• restrictions on self‐dealing between private foundations and their substantial contributors and other disqualified persons;
• requirements that the foundation annually distribute income for charitable purposes;
• limits on their holdings in private businesses;
• provisions that investments must not jeopardize the carrying out of exempt purposes; and
• provisions to assure that expenditures further exempt purposes.

“The difference, according the IRS, is that a private operating foundation is a private foundation that devotes most of its resources to the active conduct of its exempt activities,” Rosen said. “As always, when questioning a tax‐related issue, you should speak with your tax advisor.”

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