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Benefits of Having a Private Foundation If you want to give to a good cause, the easiest way to do it is to write a check. So why do tens of thousands of people go to the trouble of starting up and operating private foundations? According to the Association of Small Foundations, one reason for starting a private foundation is permanence. A foundation can consistently fund a select cause or group of causes and provide cumulative benefits to the recipients over many years of donations. The ASF also says that some families start foundations to create a legacy. A foundation established in a loved one's name is a way to honor that individual even after he or she has passed away. Establishing a foundation in a family name can also encourage family members other than the founders to participate and provide a common cause around which to bond. Tax benefits are another reason for starting a private foundation. When organized as a 501(c)(3), private foundations are tax exempt. They can collect contributions of cash and appreciated property without paying taxes on those contributions, and the contributors can claim their donations as tax deductions (with some restrictions). To qualify for the tax exemption, the foundation's purpose must be charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competitions, or preventing cruelty to children or animals. For example, the foundation may assist the poor, advance education or maintain a public building. The IRS defines three key differences between a public charity and a private foundation. Private foundations must make grants worth at least 5% of the foundation's investment assets each year, they must provide grants only to other nonprofits (though under some circumstances it is possible to make grants to individuals, such as for educational scholarships), and they must pay a 1 to 2% excise tax on the organization's investment assets. How to Establish Your Foundation First, you'll need to define your private foundation's purpose and the guidelines it will follow in making its grants. This definition will not only guide your organization's activities, it is also necessary to gaining tax exempt status.
Benefits of Having a Private Foundation If you want to give to a good cause, the easiest way to do it is to write a check. So why do tens of thousands of people go to the trouble of starting up and operating private foundations? According to the Association of Small Foundations, one reason for starting a private foundation is permanence. A foundation can consistently fund a select cause or group of causes and provide cumulative benefits to the recipients over many years of donations. The ASF also says that some families start foundations to create a legacy. A foundation established in a loved one's name is a way to honor that individual even after he or she has passed away. Establishing a foundation in a family name can also encourage family members other than the founders to participate and provide a common cause around which to bond. Tax benefits are another reason for starting a private foundation. When organized as a 501(c)(3), private foundations are tax exempt. They can collect contributions of cash and appreciated property without paying taxes on those contributions, and the contributors can claim their donations as tax deductions (with some restrictions). To qualify for the tax exemption, the foundation's purpose must be charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competitions, or preventing cruelty to children or animals. For example, the foundation may assist the poor, advance education or maintain a public building. The IRS defines three key differences between a public charity and a private foundation. Private foundations must make grants worth at least 5% of the foundation's investment assets each year, they must provide grants only to other nonprofits (though under some circumstances it is possible to make grants to individuals, such as for educational scholarships), and they must pay a 1 to 2% excise tax on the organization's investment assets. How to Establish Your Foundation First, you'll need to define your private foundation's purpose and the guidelines it will follow in making its grants. This definition will not only guide your organization's activities, it is also necessary to gaining tax exempt status.
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