Private Foundations: Do You Know the IRS Rules?
Though they’re both 501(c)(3) organizations, private foundations are very different from public charities.
If you’re considering forming an organization devoted to the distribution of funds to individuals or companies, it’s important that you know how the IRS will classify it in order to grant it tax-exempt status. There are two primary categories. Public charities solicit contributions from numerous sources (the general public, corporations, etc.) to support a specific cause (like epilepsy research or operating costs for a local crisis hotline). They do fundraising on an ongoing basis.
Private foundations, on the other hand, usually receive their funding from one source, like a corporation or family, and make grants directly to individuals and/or charitable organizations.
Would that it was that simple. As with many tax-related issues, the classification of an organization as a private foundation is complex. For starters, there are two types:
- A Private Operating Foundation is directly involved in the, “…active conduct of charitable, religious, educational, and similar activities.”
- A Private Foundation works in a more removed fashion, by giving grants to organizations or individuals.
Also, some non-exempt charitable trusts are required to follow the same rules as a private foundation. So if you know that you’re not a public charity but are not sure how the IRS will view you, please let us help you determine this.
Federal, State Formation Requirements
Private foundations, like any organization that wants to apply for tax-exempt status, must file a Form 1023. This is a lengthy document that requires information about your identity and formation, your organizational structure and activities, and compensation. Financial data is also required.
Organizations wishing to be granted tax-exempt status must file an IRS Form 1023, in addition to other paperwork.
You’ll also need to apply for an Employer Identification Number (EIN). You’ll have to have Organizing Documents that contain special provisions for private foundations as defined by the IRS. States have varying requirements for Bylaws that you’ll need to explore (federal tax law does not require any special language here). There are state laws, too, that may involve registering as a “soliciting charity” and submitting periodic financial reports.
Tax Forms Needed
Private foundations do not file the same tax forms that, for example, corporations do. But despite the fact that they are exempt from paying income tax, they must still report on their income and expenses annually to the IRS. Here are some of the forms that may be required of you when you form a private foundation:
- Form 990-PF (Return of Private Foundation). Penalties apply if this form is not filed on time.
- Form 990-T. This form is required if your private foundation has more than $1,000 (gross) in unrelated business income.
- Employment Tax. If your private foundation has employees, you’re responsible for federal income tax withholding as well as Social Security and Medicate taxes.
Can you lose your tax-exempt status as a private corporation? Yes. This can occur if you, for example, participate in political campaigns and lobbying activities or operate in a way that benefits a private shareholder or individual.
There’s much more that you need to know if you plan to be involved in the formation of a private foundation. You’ll need help as you begin and ongoing support as issues arise. We’d be happy to provide both.
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