Private Foundations Tax Law & Compliance
In 2007, there were 67,034 private foundations in the United States, according to the Foundation Center. "Private foundation" is a term in Section 501(c)(3) of the Internal Revenue Service Code used to describe any grant-making foundation not supported by public funds.
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Background
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A private foundation gets funds to make grants from an individual, family, corporation or some combination of those. For example, the Bill & Melinda Gates Foundation is a private foundation supported by the Gates family.
Tax-Exempt Status
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Private foundations must give to causes such as those for the homeless. To be exempt from paying federal, state and local taxes, private foundations must operate exclusively for purposes the IRS recognizes as tax-exempt. These purposes are "charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition and preventing cruelty to children or animals."
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Regulations
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Private foundations must also follow strict IRS regulations: They must give away at least 5 percent of the annual average value of their assets to charities and pay an excise tax on their net investment income. Private foundations also are restricted from "self-dealing," which are transactions between private foundations and what the IRS calls "disqualified persons," such as board members. This prevents an individual from privately benefiting from the foundation's resources.
Limits and Penalties
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Private foundations also have limits on their business and investment holdings and the amount of political advocacy they can fund. A private foundation must also file Form 990-PF, an informational tax return, with the IRS. If IRS requirements are not followed, foundations can be fined or have their tax-exempt status pulled.
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- Photo Credit row of a4 files image by Scrivener from Fotolia.com the homeless image by Yuriy Rozanov from Fotolia.com
