By Michele Strain
If you’re on the board of directors of a foundation, a contributor to a community foundation, or considering establishing a foundation of your own, the Internal Revenue Code distinguishes between private foundations (usually funded by an individual, family, or corporation) and community foundations or other nonprofit groups that raise money from the general public. Private foundations offer donors more control over their giving, but have more restrictions and fewer tax benefits than public charities.
Why establish a foundation? Foundations provide donors with control over their funds and provides for continuing involvement as well as a tax advantaged way to support your intended charitable goal. Charitable contributions are deductible to the donor, unless the donee organization uses any of its net earnings to benefit a private shareholder, or if it attempts to in any way influence political campaigns or legislation.
Once you have decided to establish a foundation the next choice is to determine the best solution for you – private foundation or community foundation. While the Bill & Melinda Gates Foundation is the largest private foundation in the U.S. with $33 billion in assets, most private foundations are much smaller. Two-thirds of the more than 84,000 foundations filing with the IRS in 2008 have less than $1 million in assets, and 93 percent have less than $10 million. Private foundations are typically 501(c)(3) tax exempt organizations.
Private foundations have more obligations regarding administration, investing, evaluations, making grants, audits, and tax returns. For a small endowment these costs may become a significant portion of the investment income. In addition, private foundations are subject to an excise tax on investment income, which further limits the available investment income for charitable purposes. This tax must also be reported.
Some of the family foundations in Texas include The Embrey Family Foundation in Dallas, the Gordon Hartman Family Foundation in San Antonio, The Webber Family Foundation in Austin, and the Abbott and Leslie Sprague Family Foundation in Houston.
Community foundations are designed to pool donations into a coordinated investment dedicated primarily to social improvement. Community foundations offer less control and less ongoing involvement by the donors. Community foundations do allow for separate endowments designated by the donor and do provide ongoing oversight and involvement in the distribution of grants. The community foundation typically has professional management, which provides cost effective administration, investments, and the distribution of grants, which typically increases the percentage of investment income available for charitable purposes. Community foundations can pool other funds for the donor’s designated charitable purpose and the foundation does not pay any excise tax on investment income.
In Texas there are a number of community foundations. Some of the larger ones include the Austin Community Foundation, The Dallas Foundation, East Texas Community Foundation, El Paso Community Foundation, Greater Houston Community Foundation and the San Antonio Area Foundation.
Finally, the tax consequence of a donor’s contribution depends on the type of contribution. You can contribute services, cash, or property to a charity, but services are not deductible. Cash donations are deductible, but the deduction is limited to 50 percent of your adjusted gross income. Property is deductible and the donor is entitled to deduct the value of the donated property for that year. If the property has appreciation, neither the donor nor the charitable organization will pay tax on the appreciation of the property. If you are contributing property that would have yielded a long-term capital gain in a sale, then the deduction for the contribution is limited to 30 percent of the donor’s adjusted gross income in the year of donation if the recipient is a public charity, and limited to 20 percent if it’s a private foundation. There is a double advantage to contributing appreciated property like stocks or real estate. This is the deduction for the fair value of the property and the avoidance of the capital gain tax.
Michele Strain is a Partner at PMB Helin Donovan, LLP, Austin, firstname.lastname@example.org
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