IRS: Private Foundations

Charitable organizations are considered private foundations unless they meet certain requirements. A brief explanation from the IRS of these requirements and the effect of private foundation status when these requirements are not met.

Every organization that qualifies for tax exemption as an organization described in 501(c)(3) is a private foundation unless it falls into one of the categories specifically excluded from the definition of that term (referred to in 509(a)). Organizations that fall into the excluded categories are generally those that either have broad public support or actively function in a supporting relationship to such organizations. Organizations that test for public safety also are excluded. Even if an organization falls within one of the categories excluded from the definition of private foundation, it will be presumed to be a private foundation, with some exceptions, unless it gives timely notice to the IRS that it is not a private foundation. If an organization is required to file the notice, it must do so within 15 months from the end of the month in which it was organized.

There is an excise tax on the net investment income of most domestic private foundations. This tax must be reported on Form 990-PF, Return of Private Foundation, and must be paid annually at the time for filing that return or in quarterly estimated tax payments if the total tax for the year is $500 or more. In addition, there are several restrictions and requirements on private foundations, including (1) restrictions on self-dealing between private foundations and their substantial contributors and other disqualified persons; (2) requirements that the foundation annually distribute income for charitable purposes; (3) limits on their holdings in private businesses; (4) provisions that investments must not jeopardize the carrying out of exempt purposes; and (5) provisions to assure that expenditures further exempt purposes. Violations of these provisions give rise to taxes and penalties against the private foundation and, in some cases, its managers, its substantial contributors, and certain related persons. For more information, download Recent Developments Under Chapter 42 or Private Foundation Issues.

A private foundation cannot be tax exempt nor will contributions to it be deductible as charitable contributions unless its governing instrument contains special provisions in addition to those that apply to all organizations described in 501(c)(3). See Publication 557, Tax-Exempt Status for Your Organization, for examples of these provisions.

For more information on private foundations, see Publication 578, Tax Information for Private Foundations and Foundation Managers, which may be obtained by calling 1-800-TAX-FORM (1-800-829-3676).