FAQ: Private Operating Foundations
- What is a Private Operating Foundation?
- Can a Private Operating Foundation accept donations from the general public?
- Are donations to a Private Operating Foundation tax deductible?
- Are Private Operating Foundations subject to the various excise taxes imposed on private foundations?
- How does a private foundation qualify to become a Private Operating Foundation?
1. What is a Private Operating Foundation?
Like other traditional private foundations, a private operating foundation is a federally tax-exempt organization under IRC Section 501(c)(3) that is funded primarily by one or a few donors (and thus cannot meet the public charity support or facts and circumstances tests). The distinguishing factor of a private operating foundation is that it also operates one or more charitable programs. Note that this does not preclude it from conducting grantmaking activities as well.
2. Can a Private Operating Foundation accept donations from the general public?
Yes. Accepting donations is not prohibited. If the foundation attracts donations from enough sources then it may qualify for public charity status.
3. Are donations to a Private Operating Foundation tax deductible?
Yes. In fact, donations to private operating foundations receive the more generous deductibility limits afforded to public charities as follows:
Type of Gift
Tax Deductibility Limits
60% of Donor's Adjusted Gross Income
30% of Donor's Adjusted Gross Income
4. Are Private Operating Foundations subject to the various excise taxes imposed on private foundations?
In general, private operating foundations are subject to the excise tax laws pertaining to private foundations. However, there are two exceptions as follows:
- Minimum Distribution Requirements Private operating foundations are not required to make annual minimum distributions under IRC § 4942.
- Some private operating foundations may claim exemption from the excise tax levied on its net investment income under IRC § 4940. See the IRS website for the qualifications of an exempt operating foundation
5. How does a private foundation qualify to become a Private Operating Foundation?
To become a private operating foundation, a foundation must demonstrate that the majority of its income is used to provide a charitable service or operate a charitable program. To do this, a foundation must first demonstrate to the IRS that it passes the income test. In order to pass this test, it must show that it spends at least 85% of its adjusted net income or its minimum investment return (whichever is less) on the active conduct of its exempt activities (not grants). Additionally, the foundation must pass one of the following 3 tests:
- Assets test - A foundation will pass this test if at least 65% of its assets:
- Are used in the active conduct of its exempt activities, a functionally related business or a combination thereof;
- Consist of stock of a corporation that is controlled by the foundation and at least 85% of the assets of that corporation are used in the active conduct of the foundation's activities; or,
- Are any combination of the above.
- Endowment test - A foundation will pass this test if its expenditures on the active conduct of its exempt activities is at least two-thirds of its minimum investment return.
- Support test - A foundation will pass this test if:
- 85% or more of its support (excluding gross investment income) is normally received from the general public and 5 or more unrelated tax-exempt entities;
- No single exempt organization contributes more than 25% to its support (excluding gross investment income); and,
- Not more than 50% of its support normally comes from gross investment income.
- Finally, to become a private operating foundation, a foundation must demonstrate that it passes the above tests for any three years during a four-year period (financials for each of the three years is considered individually) or that it passes these tests for a four-year period which includes the current tax year and the previous three years (using this method, the financials for the four years are considered in aggregate).