Why A Community Foundation

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PRIVATE FOUNDATION

COMMUNITY FOUNDATION

Tax Filings and Liability

  • Contributors must prepare a detailed federal tax return (Form 990PF) that publicly discloses their identities and requires supporting schedules as well as state filings.
  • Contributions are subject to an annual excise tax of up to 2% on the net investment and net capital gains.
  • As component funds, contributions are included in the foundation’s annual Form 990 to the Internal Revenue Service, thereby relieving contributors of the time and expense of having to file.
  • A community foundation is a tax-exempt 501(c)(3) entity.

Tax Advantages

  • The deduction for gifts of cash is limited to 30% of Adjusted Gross Income (AGI).
  • The deduction for gifts of appreciated, publicly traded stock is limited to 20% of AGI.
  • Appreciated property other than publicly traded stock can only be deducted at the lower of fair market value or the basis value.
  • A new private foundation’s ability to establish its tax-exempt status can take several months.
  • The deduction for gifts of cash is limited to 50% of AGI.
  • The full market value of appreciated property is deductible from income up to 30% of AGI.
  • Appreciated property can be deducted for the fair market value.
  • With a favorable tax-exempt ruling from the IRS, contributions to a community foundation are immediately deductible.

Operations and Administration

  • Administration of funds can be costly and time-consuming.
  • A private foundation does not qualify for public charity status.
  • A donor has complete control over a fund’s use subject to private foundation restrictions.
  • A new private foundation must establish and maintain the following:
    • A mechanism for receiving and managing gifts of real estate, securities, and cash
    • A means of evaluating requests for grants from nonprofit agencies
    • A system for verifying the tax-exempt status of grantees
    • Qualified, professional support staff
    • Office space and equipment
    • Knowledge of the needs of the community
    • A mechanism for adhering to strict regulations regarding the dealings between a private foundation and persons or corporations closely related to it.
  • Administrative costs are shared by all funds.
  • A community foundation meets the IRS’s “public support test,” thereby qualifying it as a public charity.
  • Donor-Advised Funds are the most flexible funds in a community foundation.
  • A community foundation has the following developed and in place:
    • A mechanism for receiving and managing gifts of real estate, securities, and cash
    • A means of evaluating requests for grants from nonprofit agencies
    • A system for verifying the tax-exempt status of grantees
    • Qualified, professional support staff
    • Office space and equipment
    • Knowledge of the needs of the community
    • Safeguards for limits on related party transactions to a Donor-Advised Fund

Monitoring and Oversight

  • A private foundation that makes grants to other private foundations or new charitable agencies or that has not received public charity status is subject to federal monitoring and reporting requirements.
  • A community foundation must be able to demonstrate that its money is being used for charitable purposes but does not need to report such information to the federal government.

Public Disclosure

  • A private foundation’s tax return and the names of its contributors are open to public inspection.
  • Contributions to a community foundation can be made anonymously.

Payout Requirements

  • A private foundation must pay a minimum of 5% of its net asset value annually for charitable purposes, regardless of its earnings.
  • A community foundation has no minimum payout requirements so it can be more flexible in accepting gifts such as undeveloped real estate or other assets that produce little or no initial income.

Investments

  • A private foundation’s investments are subject to heightened scrutiny.
  • A community foundation invests in a balanced portfolio for maximum returns.