Four Tax Benefits of a Private Foundation
Private foundations receive certain tax incentives to encourage philanthropic giving and to support the important work that foundations do in advancing social causes, promoting education, supporting scientific research and providing resources to underserved communities.
The guide's collection of resources from Foundation Source includes the following:
"For HNW individuals who are building out charitable giving plans, private foundations offer an opportunity to save in taxes while creating a lasting philanthropic legacy," said Jeffrey Haskell
, Chief Legal Officer of Foundation Source. "Some of the main tax benefits are income tax savings, income tax-free growth of assets, capital gains tax savings, and estate tax savings. As philanthropists and their advisors have conversations about advanced tax strategies, it's important to understand and consider the benefits of a private foundation structure."
The 2023 Guide to Tax Strategies for Private Foundations
shares insights about the following areas:
- Income Tax Savings: One of the immediate benefits for contributing to a private foundation is an income tax deduction of up to 30 percent of the donor's adjusted gross income (AGI). The donor receives a tax deduction up front and can make charitable contributions over time, enabling him or her to give strategically instead of in the usual year-end rush.
- Capital Gains Tax Savings: A donor may also be able to avoid paying capital gains taxes by donating highly appreciated assets to their private foundation. For example, if a donor were to give appreciated stock held over a year to the foundation, the donor typically would be entitled to receive an income tax deduction for the full, fair-market value of the stock. If the foundation sells the stock in the future, it will pay only the nominal excise tax of 1.39% on the net capital gains.
- Tax-Advantaged Growth of Assets: Because the funds contributed to a private foundation are able to grow in a tax-advantaged environment, over the years, the foundation's assets will likely exceed the total amount of the donor's contributions. The result will be a significant charitable legacy that the donor's heirs can continue to control and pass to future generations in perpetuity.
- Estate Tax Savings: Assets contributed to a private foundation are excluded from the donor's estate and, therefore, not subject to federal or state estate taxes. For high-net-worth individuals who have a strong charitable interest, private foundations offer an opportunity to avoid paying estate taxes while simultaneously creating an enduring philanthropic legacy.
- Taxable Expenditures: Private foundations must abide by specific rules, regulations, and processes pertaining to taxable expenditures. Understanding how and why private foundations must adhere to these federal guidelines is crucial to ensuring they are able to remain operational and impactful. In some cases, the guidelines are clear-cut – expenditures made for lobbying, electioneering, and voter registration drives, for example, are strictly prohibited. However, parameters around other areas like grants to domestic or foreign organizations that are not public charities or granting to individuals can be more complex, with potentially adverse outcomes if disregarded.
"We have prepared and examined thousands of private foundation tax returns over the 22 years," said Mr. Haskell. "And that experience has helped us identify the most common pitfalls and missed opportunities associated with Form 990-PF. By maximizing the funds available to a foundation, donors can capture valuable tax benefits and have an even greater positive impact on the world."
About Foundation Source
Foundation Source is the nation's largest provider of foundation management services and a trusted source for philanthropic expertise. We offer purpose-built software applications and a configurable suite of tech-enabled administrative, compliance, tax and advisory solutions for private philanthropists and their foundations.
For more than two decades, Foundation Source has been empowering people and companies to create a better world through philanthropy. We work with individuals, families, boards and professional advisors to bring philanthropic visions to life and make giving easier. Today we are proud to support more than 2,000 unique foundations representing over $22 billion in charitable assets.