Public Charity vs Private Foundation

What differentiates a public charity from a private foundation?

We hear this question quite often, so let’s break it down.

What's the Difference?

First, public charities:

• Are churches, hospitals, or qualified medical research organizations affiliated with hospitals, schools, colleges and universities,
• Have an active program of fundraising and receive contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities,
• Receive income from the conduct of activities in furtherance of the organization’s exempt purposes, or
• Actively function in a supporting relationship to one or more existing public charities.

In contrast, private foundations usually have a single major source of funding, typically gifts from one family or corporation rather than funding from many sources. Most private foundations make grants to other charitable organizations and individuals as their primary activity, rather than the direct operation of charitable programs.

What Is Schedule A?

If an organization falls into the following three categories, they will need to use Schedule A. If an organization is described in section 501(c)(3) and is a public charity: it is described in sections 501(e), (f), (j), (k), or (n): or it is a nonexempt charitable trust described in section 4947(a)(1) that is not treated as a private foundation.

If an organization isn’t required to file Schedule A and decides to fill it out, they must complete the full schedule with all of the information required.

Can You Explain Public Support?

If an organization receives more than 10% but less than 33 and ⅓% of its support from the general public or a governmental unit, it can qualify as a public charity. It is up to the charity to establish that it normally receives a substantial part of its support from governmental units or the general public.

And that, in a nutshell, is the difference between public charities and private foundations.

Hope this clears things up! If you have any other questions, reach out to ExpressTaxExempt at 704.839.2321.

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Can Form 990 Be a Marketing Tool?

If you’re running a nonprofit organization, you might be dreading the next few weeks. Why?

Well, because it’s that time of year when you have to file your Form 990 return!

Instead of letting your heart fill with dread, instead ask yourself if you can use Form 990 to your advantage. Instead of seeing it as just another tax form, look at it like an opportunity where you can tell your story and draw in more donors.

That’s right, with a little planning, you can use Form 990 as a marketing tool.

Post Form 990 Online

By sharing your tax return with your donors and the general public, you show that you are transparent.

You also present the facts about how your organization has helped. Nothing is better than cold hard data!

Your Form Tells a Story

Instead of using a generic summary, your organization can impress audiences with their story!

With thoughtfully written descriptions of your organization, their goals, and their accomplishments, you’ll be able to cast your own light on your organization.

Just make sure you’re truthful and accurate! Schedule O also allows for additional details, and you can always list the organization’s website.

Make It Look Good

It’s not only important for your story to shine, you also need to make sure your answers and numbers are good.

For an accurately completed Form 990, you need to avoid unrelated revenues, lobbying, loans and business transactions with insiders, and untruthful answers (for example, the questions in Part V).

As far as errors go, ExpressTaxExempt checks your return for filing errors before transmitting to the IRS.

Pass the Test

Every tax exempt organization must demonstrate that it continues to meet the requirements set under section 501(c)(3). In Schedule A, organizations have to classify as a Public Charity or a Private Foundation.

If they’re a public charity, they need to pass one of 2 tests.

The first test states that your organization receives substantial support in contributions from publicly supported organizations, governmental units, or from the general public.

The second test states that your organization receives no more than one-third of its support from gross investment income, and more than one-third from contributions, membership fees, and gross receipts from exempt-related activities.

So when you’re ready to file Form 990, you’re going to want to save time on the difficulties of paperwork so you can get your story across.

Start by e-filing Form 990 with ExpressTaxExempt, the premier filing solution for tax exempt organizations. With bulk uploading, multi-user access, and help available by email and phone, we’ll help you get through the tough stuff.

Can your organization’s Form 990 become a marketing tool?

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What is the Public Charity Support Test?

As a publicly funded organization, there are many trials and tribulations out there for a tax exempt organizations and nonprofits. We’ve covered how you can get more donations and how to get more volunteers, but what other challenges await you? One such is the Public Support Test from the IRS.

What Does It Mean When You Fail to Meet a Public Support Test?

Let’s establish what the public support test is first. After your organization has been active for five years, the IRS will monitor the organization’s public charity status based on the public support information reported annually on Schedule A. After the first five years, the support test kicks in.

According to the IRS, for an organization to qualify as a publicly supported organization under section 170(b)(1)(A)(vi), either:

• 33% or more of its total support must come from governmental agencies, contributions from the general public, and contributions or grants from other public charities; or 
• 10% or more of its total support must come from governmental agencies, contributions from the general public, and contributions or grants from other public charities and the facts and circumstances indicate it is a publicly supported organization.

The support test is based on a five-year computation period, consisting of the current year and the four years immediately before this one. If your organization meets the public support test for a tax year, it is treated as a publicly supported charity for that year and the succeeding year, regardless of its actual support for the succeeding year.

Losing Tax Exempt Status

There’s a chance an organization may have lost its tax exempt status without knowing. That’s why we suggest you keep track of and monitor your returns, so you don’t unexpectedly lose your status.

An organization will not meet either of these public support tests if almost all of their support comes from gross receipts from related activities. Public charities need to have an insignificant amount of its support come from governmental units and contributions made directly or indirectly by the general public. If a public charity fails the test, it would then be considered a private charity.

The good news is that here at ExpressTaxExempt, we can get you e-filing Form 990 and 990-EZ in no time. Just make sure you have your records of the last 5 years, and we can get you squared away with Schedule A.

If you run into any issues e-filing Form 990, reach out to our dedicated customer service team, who will gladly answer any of your questions. With live chat, 24/7 support email, and phone support at 704.839.2321, our customer service team is ready to help!

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Private Foundations

In the recent blog, “Public Charity Test,” we mentioned briefly how Private Foundations have more regulations than Public Charities along with paying a tax on investment income. But that was just a small tidbit about the differences between private foundations and public charities. All exempt organizations listed under section 501(c)(3) are considered private foundations until they can prove they qualify for public charity status.

What is a Private Foundation?
The main difference between a private foundation and a public charity is donor control, that’s it. If your organization operates as a private foundation, then you receive all of your funding from a single donor or a limited group of donors. These donors are usually just one person, a family, or a corporation, but not the general public.

Generally, private foundations have about four sub-categories:

• Traditional - This is your most common type of private foundation. It may be fully funded by an endowment, or receive funding annually by its donor. The main function of a traditional private foundation is typically to produce grants.
• Pass-Throughs or Conduits - These types of private foundations keep their donor’s contribution under lock for a short amount of time. The contribution from the donor, and any acquired income with it, is dispersed after the end the tax year in which the contribution was made - usually within two months.
• Operating - An operating, private foundation works like a public charity in which it has its own charitable activities such as a museum or library; however, that doesn’t make it a public charity - remember about donor control. The only difference with an operating, private foundation is that engages more in working programs than grants.
• Pooled Common Funds - Both the donor and donor’s spouse can annually choose the recipients of their funds. Generally, the recipients are public charities and even after the end of the donors’ lives, the funds still go to the charity that they have chosen.

Even if your organization has the word “foundation” in its name, that doesn’t mean that you operate as a foundation; it’s all about how you receive your donations. Usually, private foundations are privately created, funded, and managed by either a single person, a family, or a corporation.

Because of the donor control of private foundations, they do not rely on public donors for support; therefore, they are not under the same close, public examination as public charities are. One thing you can bet that private foundations and public charities have in common is both of their tax returns are due on the 15th day of the 5th month after the end of the tax period.

Select your organization status in Schedule A and complete the rest of your tax return form with Express990. We support Form 990, 990-EZ, and 990-N (e-Postcard), and we offer a safe, secure, and accurate e-filing process that will save you time and money.

For any assistance with e-filing our available 990 forms, you can contact our live professionals by phone (704-839-2321, Monday through Friday from 9am to 6pm, Eastern Standard Time), by email (support@expresstaxexempt.com), or by live chat (www.expresstaxexempt.com).

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Qualifying for Public Charity Status

Most officers' of publicly-supported organization have questions about their organizations' public charity status. It can be complicated at first, but the Express990 Team has a few tricks to make it a bit easier. Obtaining public charity status is important to understand as well as how to maintain it. To avoid possible loss of public charity, it is important to monitor your organization's financial support. Here are a few helpful ways to check if your organization qualifies as a public charity:

Identifying Current Status

To check your current status with the IRS, you can visit their EO Select Check page. You can also check to make sure your status hasn't been revoked by going to the IRS Automatic Revocation of Exemption List. It's a lot of links right off the bat, but trust me, it is sometimes much easier to check on your status through the IRS web page then having to call them directly. 

Public Charity Status

Public charity status is only applicable to 501(c)(3) organizations. To receive this status you would have filed a Form 1023. For more information on receiving 501(c)(3) status check out my blog - How Does An Organization Receive 501(c)(3) Status?

Public Support Test
The public support test is basically a fraction. It is the sum of the organization's public support during the five year period over the sum of the organization total support during the five-year period. In simple words, the organization must have at least 33 and 1/3 public support to qualify as publicly supported.

Supporting Organization
Public support is classified as a gift, grants and contributions from government and public sources; gifts, grants and contributions from private sources, such as individuals, businesses and private foundation; government contracts to provide a service or maintain a facility for the benefit of the general public; qualified sponsorship payment; and membership fees for the organization general support.

Let's Sum It Up
As long as organization receives more than 33 and third percent of it support from the items listed above, they will be considered a public charity. Don't forget you can always check your status on the IRS EO Select Check page and you can make sure your status hasn't been revoked through the IRS revocation list - linked above.  

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