A foundation in the United States is a type of charitable organization. The Internal Revenue Code distinguishes between private foundations (usually funded by an individual, family, or corporation) and public charities (community foundations and other nonprofit groups that raise money from the general public). Private foundations have more restrictions and fewer tax benefits than public charities like community foundations.
Not all non-profit organizations are charitable, and only charitable organizations can receive tax-deductible contributions and avoid paying property and sales tax. For instance, a donor would receive a tax deduction for money given to a local public library if the library was classified as a 170(c)(1) charitable organization, but not for giving money to the National Rifle Association, even though the NRA is also a non-profit association. To be certain that a non-profit organization is classified as a charitable entity, the donor would need to know the section of IRS code under which it achieved its non-profit status and if entities operating under that section are considered charitable for tax purposes.
Foundations and public charities are treated differently for tax purposes. The major differences between a private foundation and a public charity regarding taxes are:
- a foundation must pay out 5% of its assets each year while a public charity does not,
- donors to a public charity receive greater tax benefits than donors to a foundation, and,
- a public charity must collect at least 10% of its annual expenses from the public in order to remain tax-exempt while a foundation does not.
Neither a public charity nor a foundation can pay for or participate in partisan political activity, unless they surrender their tax-exempt status including voiding the deductibility of any tax deductions for donors after the surrender or revocation date.
There are "operating" foundations and "grant-making" foundations. Operating foundations use their endowment to achieve their goals directly. Grant-making foundations use their endowment to make grants to other organizations, which indirectly carry out the goals of the foundation. A library foundation may be either operating or grant-making.
The best way to create a foundation is have it set up with an arm’s-length relationship. A foundation set up as a completely separate entity from the library is best or the foundation will be subject to the same laws and regulations that the library must follow.
Beginning steps for creating this type of foundation.
Some guidelines to consider in setting up a foundation.
** see note on Tax Exempt Status
Revised March 24, 2016
return to Funding and Financial Operations page