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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Getting to Know Schedule A

Whether you’re new to the Form 990 Series or could do it with your eyes closed at this point (which, if you can, my hat’s off to you), it’s important to stay informed on exactly what you’re filing each year with the IRS. And if you’re filing a Form 990 or a Form 990-EZ, you’re probably filing a Schedule A along with it. But if you’re not 100% sure what Schedule A is all about, you might be hesitant to jump right in or may even wonder if it’s really the right thing for you (which, chances are, it is).

So what is Schedule A?

Think of Schedule A as the IRS just trying to get to know you better: So, what is it you do? Really? That sounds so interesting! How do you go about doing that? Well, do you have anyone helping you, you know, financially? Tell me about them in detail! What about your mission statement? Surely you’ve got a mission statement...I’d love to hear it!

That doesn’t sound so bad, does it?

Okay, so they’re kind of out there for just getting-to-know-you questions. The IRS comes on strong, but it means well. Maybe it’ll help to put you more at ease if you get to know a little bit more about Schedule A:

Schedule A is not the exclusive type; it’s used by all tax-exempt organizations recognized under 501(c)(3). But, rest assured that when you’re with it, it’s only got eyes for you. Schedule A is also every bit as nosy as it presents itself to be, requiring information about what type of organization you are, such as whether you’re classified as a government, educational, community, or grassroots organization. And before you can go all the way with it, it wants to know where you’ve been: who have you received support from and in what forms (grants, gifts, etc.)?

Just think of Schedule A as a very invasive first date. And, while that might not be your cup of tea, as the saying goes, you have to kiss a lot of frogs to get to a prince. The same applies here: you have to fill out a lot of information - Schedule A included - to maintain your organization’s tax-exempt status.

So if you have any questions about Schedule A, Form 990, or any of the other schedules, or just need a pep talk before jumping right into the date, consider Express990 your own personal support team. We’re here by phone (704-839-2321) and live chat (www.expresstaxexempt.com) Monday through Friday from 9 a.m. - 6 p.m. EST. We’re also available 24/7 through email at support@expresstaxexempt.com.

Now go get em, tiger!

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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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Public Charity Test

When you’re filling out a Form 990 or a Form 990-EZ, you’re going to come across Schedule A, which asks if your tax-exempt organization is considered a Public Charity or Private Foundation. According to experts, there’s a default rule that all 501(c)(3) organizations are labelled private foundations until they can prove public charity. 

Private Foundations are exposed to more regulations than Public Charities, and they have to pay a tax on investment income. But that’s information for another blog. To prove that your tax-exempt organization is a Public Charity, you have to pass one of two tests administered by the IRS.

Test 1
The first test states that your organization receives a substantial support in contributions from publicly supported organization, governmental units, or from the general public.

Example: Your organization’s revenue is made through widespread public fundraising campaigns, federated fundraising drives, or government grants.

Experts may explain this as the Donate Charity Test in which your organization normally receives at least one-third its total income from government grants, grants from other public charities, and from members of the public. However, there is a limit.

Only two percent of your funding can come from any one donor, foundation, or corporate fund that’s counted as the numerator, while the entire amount of the gift is counted as the denominator.

Test 2
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.

Example: You have a membership-free organization like a parent-teacher group, or an art group with box office revenue.

This is also explained as the Gross Receipts Charity Test, which includes receiving at least one-third of your support from government grants, grants from other public charities, and from members of the public. But also by receiving your support from revenues generated by activities within the organization’s exempt purpose.

The second test has a different limit on the amount that can be counted as the numerator. Receipts only up to the greater of one percent of the charity’s total support during the year, or $5,000, is counted as the numerator. The total amount of the gift is the denominator.

These are only glimpses of the complexity of these two test. Of course, there are exceptions, like the Unusual Grant Exception, exclusions, and even exceptions from exceptions. For a careful analysis of your organization’s Schedule A classification, you would want to consult with an accountant or tax professional.
E-file your Schedule A, along with the rest of your Form 990 or 990-EZ, with Express990. We offer a safe, secure, and accurate e-filing process that will save you time and money. We are also backed by expert help with technical and support teams that are the most experienced in the industry, knowing the in’s and out’s of the filing process better than anyone else.

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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