Differences in Public Charities and Private Foundations
- Aileen B. Bolger
In the nonprofit world, an organization is either a public charity or a private foundation but cannot be both.
In the eyes of the IRS, the default setting for a 501(c)(3) organization is a private foundation — unless it requests, and qualifies, for a ruling that proves otherwise. In fact, the IRS will not say that an organization is a public charity — only that it is not a private foundation. Private foundations and public charities are distinguished primarily by the level of public involvement in their activities.
Public charities engage in activities to support their stated purpose of exemption. Although there are several specific exclusions from private foundation status, in general, a public charity is an organization that:
In most cases, organizations that qualify for public charity status include churches, schools, hospitals, medical research organizations, publicly supported organizations (organizations that receive a specified portion of their total support from public sources), and certain supporting organizations.
Like public charities, private foundations also engage in activities that enhance or support general welfare. But, by contrast, funding is derived from a single source — typically from a family or corporation. Additionally, most private foundations do not provide charitable services or events. Instead, the foundation provides funding to other organizations to do so.
An easy way to understand the distinction is that public charities perform charitable work — while private foundations support the work of public charities.
There is also the option of “private operating foundation.” These are hybrids of the two and are most often a private foundation that provides direct program services like those operated by public charities. Control of the entity is like that of a private foundation, but it has some of the benefits of a public charity.
A nonprofit first states its intentions when seeking approval of its tax-exempt status. The IRS determines the proper classification based on information provided on Form 1023. Using Schedule A, a public charity makes its case by indicating that it fits within a particular organization category that is not considered a private foundation. It includes a calculation of the percentage of support from public support and investment income. The organization then affirms its status with the IRS each year on Form 990.
Understanding the distinction between public charities and private foundations (and adhering to the rules) is critical for nonprofit executives and board members. A public charity that does not act like a true public charity can lose its charitable status and be subjected to an entirely new level of accountability with additional IRS reporting requirements. These include a host of restrictions that public charities simply don’t face, including required minimum distributions of funds each year, paying excise taxes on investment income, and disposing of excess business holdings.
In the end, it is important for the IRS to know which type of nonprofit you are. Contact CRI’s nonprofit CPAs to discuss how we can help make sure your public charity doesn’t blur the lines and start acting like a private foundation.
Subscribe to our e-communications to receive the latest accounting and advisory news and updates impacting you and your business.