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Private Foundation Tax Benefits

What is a private foundation?

Private foundations are charitable organizations usually established by a family member, an individual, or a company solely to fund charitable causes. Private foundations are tax-exempt non-profit organizations clearly defined by the IRS under section 501(c)(3). A Well-known example is The Bill & Melinda Gates Foundation.

A board of trustees or directors supervises a private foundation. They are responsible for receiving donations from charitable sources, managing and investing funds for philanthropic purposes, and giving grants to other charitable organizations. In addition, the board of trustees is responsible for filing tax returns and other administrative reporting requirements. As a result, private foundations are subject to stricter tax laws and regulations than public charitable organizations.

Types of private foundations

There are two kinds of private foundations:

Operating foundations are involved with managing a charitable initiative or business, such as the museum.

Non-operating foundations accomplish their charitable purposes primarily through providing donations to charitable organizations. Though they can run programs, this isn’t their primary purpose.

Non-operating foundations are the most common kind of private foundation and can be organized in various ways. For instance, the non-operating family foundation generally represents the interests and assets of one family, and an independently-operating foundation like the Ford Foundation is managed independent of the benefactor, the family of the benefactor, or a company.


Benefits of Private foundation

Income Tax Savings

One of the private foundations’ most immediate tax advantages is that donors can get a tax deduction on any amount they contribute to a private foundation. In addition, donors can get up to a 30 percent deduction from their adjusted gross income (AGI).

Capital Gains Tax Savings

In addition to the tax deduction on income tax donations to private foundations, donors might also be able to avoid paying capital gains tax when they donate highly appreciated assets to an individual foundation. If, for instance, the donor donated appreciated stocks to a foundation, they are entitled to an income tax deduction of the fair market worth of the asset. If the foundation decides to sell its stock, it will only pay the nominal tax on excise of 1.39 percent on the capital gains.

Estate Tax Savings

If the assets are given to a private foundation, they are not included in the donor’s estate and, consequently, are not subject to the state or federal estate tax. For those with high net worth who have an enduring interest in charitable causes, private foundations provide the possibility of avoiding having to pay estate taxes and leaving a lasting legacy to philanthropy.

Tax-Advantaged Growth

Because assets you contribute to a private foundation will grow in a tax-advantaged environment, over the years, the foundation’s value will likely exceed the total amount of your contributions–despite making regular charitable grants. This will result in an impressive legacy to a charity that your heirs can oversee and pass on to the next generation.

Pay Expenses and Hire Staff

Private foundations can exercise the same rights as other charitable entities. They can, for instance, fund charitable expenses and employ employees, including family members.


If you are a legitimate member of an individual foundation, all reasonable expenses incurred during your philanthropy contribute to the minimum distribution requirement of your foundation. The IRS requires that private foundations provide at least 5% of their average investment assets each year. The cost of travel for board meetings, site visits, conferences, office supplies, and our fees for Foundation Source qualify.


Federal tax law allows foundations to provide “reasonable compensation” to qualified staff, even if the foundation’s managed by family members. Foundation Source’s compensational Benchmarking Program is for clients who want to ensure compliance with IRS regulations.

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