Up Your Charitable Giving Game, Learn How Private Foundations Work

Private Foundation allow donors to leave a personal and family legacy, make philanthropy a family affair and receive tax deductions

 Private foundations have proven to be incredibly successful engines of positive change!

So, what is a private foundation?

Any organization that qualifies as tax exempt under section 501(C)(3) of the internal revenue code can be considered a private foundation. Examples of organizations that one may think would be included are; hospitals, universities and those having a wide array of public support, however, these are excluded from the definition.

Although an organization falls into just one of the categories excluded from the definition, it will automatically be considered a private foundation as an exception unless it gives the IRS a filed notice stating that it is not a private foundation within 27 months of the end of the month in which it was established. Some nonexempt charitable trusts are treated as private foundations.

How are these foundations funded?

Foundations are typically created via a single primary donation from an individual or business. Income is generated by investing this initial donation, and in turn disbursing a majority of the investment income to desired charitable organizations or activities. All funds and programs are managed by the foundations trustees or directors.

Private foundation tax treatment

All nonexempt trusts treated as a private foundation must file an annual return of private foundation ─ form 990-PF and 1023 whenever applicable. For domestic private foundations, an excise tax is charged on net investment income, and some foreign private foundations are subject to tax on gross investment income. There are also certain nonexempt trusts which contain charitable and private interest that may become subject to some private foundation tax provisions. Trusts that contain the private foundation tax provisions must file form 5227 annually, which is the split-interest trust information return. A private foundation can neither be tax exempt nor will any contributions made to it be deductible as charitable contributions unless its governance contains special provisions in addition to those that apply to all organizations listed in 501(C)(3). There are many private foundations that are not 501(C)(3) entities.

Donor tax advantages

A donor’s income tax will be deducted each year that a contribution is made up to 30% of the donor’s adjusted gross income. Donors can avoid paying capital gains taxes by donating highly appreciated assets to a private foundation. For high net-worth individuals who have a strong interest in charitable giving, private foundations offer an opportunity to avoid paying estate taxes while creating an everlasting legacy.

Private foundation  public charity?

Private foundations and public charities have essentially the same classification in respect to being tax-exempt and being a 501(C)(3) organization, however, there are some key differences in how they govern themselves and accomplish their work. Private foundations typically give grants to public entities even though they may conduct their own charitable activities. Public charities usually provide their own services. Unlike public foundations, a private foundation derives financial support from a single individual, family, or corporation. Since private foundations are self-funded, it is advantageous in helping them avoid the IRS tests that are required with public charities. Even though they fund-raise, private foundations do not normally engage in any fundraising activities. 


Private Foundation. (2018, February 8). Retrieved from Investopedia: https://www.investopedia.com/terms/p/privatefoundation.asp

Private Foundations. (2018, July 23). Retrieved from IRS: https://www.irs.gov/charities-non-profits/charitable-organizations/private-foundations

What is a Private Foundation? (n.d.). Retrieved from Foundation Source: https://www.foundationsource.com/learn-about-foundations/what-is-a-private-foundation/

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