Articles · Basics · Nonprofit Tax and Form 990
Public Charity vs. Private Foundation
Every Section 501(c)(3) organization is presumed to be a private foundation unless it shows that it qualifies as a public charity. The distinction affects donors, taxes, and regulation.
How public charity status is earned
Section 509 covers churches, schools, hospitals, and organizations with broad public support. It also covers supporting organizations. Under the common test, an organization shows public support of at least one-third over five years, or at least 10% with supportive facts and circumstances.
The test is reported on Schedule A of Form 990. A new organization generally has a five-year grace period.
Private foundation rules
Private foundations are usually funded by a family or business. They pay an excise tax on net investment income, and face rules on self-dealing, minimum distributions, excess business holdings, jeopardizing investments, and taxable expenditures.
Donors also get lower deduction limits on some gifts than they would for public charities.
Practical points
Large gifts can hurt the public support ratio, so charities should monitor it. Grants from public charities and government sources usually count more favorably. Review the calculation each year, before a single donation creates a problem.
Key takeaways
- Exempt organizations start as presumed private foundations.
- Schedule A shows public support.
- Private foundations face stricter excise tax rules.
For general education only, not tax advice. Tax law changes often, so confirm current rules and amounts with primary sources.