Natalya Attestatova, CPA

What are private operating foundations?

March 27th, 2010

Operating foundations do more than only distributing grants for charitable purposes – they also are involved in their own charitable programs. The regulatory rules applicable to the private operating foundations are similar to private foundations. There are significant advantages enjoyed by private operating foundations:

1. Donors may take advantage of the favorable income tax charitable deduction rules – similar to the ones for public charities – 50% AGI limitation for charitable contributions deducted on Schedule A.
2. Operating foundations are NOT subject to the income distribution requirement for private foundations under 4942.

How to qualify for the private operating foundation status? Satisfy two tests:

• Income test – 85% or more of foundation’s income is used for “active conduct of charitable activities” (not just for grantmaking)
• One of three tests:

                 The assets test – at least 65% of the foundation’s asset are devoted to the active conduct OR to functionally-related businesses

                The endowment test – the foundation must spend at least 3-1/3% of net investment assets on the active conduct

                The support test – 85% of its support must come from the general public and five or more unrelated non-profits.

Entry Filed under: Other