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Payout Requirements for Private Foundations

Two woman at board meeting table

When forming a nonprofit organization, at some point founder have to weigh the merits of the public charity versus the private foundation. Both are classified by the IRS as 501(c)(3)s. There are indeed benefits and challenges to the structure of both nonprofits, but private foundations can be subject to stricter oversight and need to meet different requirements to retain compliance. Because all the different aspects of a private foundation can be difficult to parse out together, it’s helpful to break it down. We’ve covered self-dealing and now it’s time to explore the payout requirement for private foundations.

Qualifying Distributions

Unlike public charities, private foundations are required to spend a minimum amount—called a qualifying distribution—for grants, administration, and other charitable distributions every year, or pay a penalty. The amount of the qualifying distribution is equal to 5% of the fair market value of the foundation’s assets during that year.

Private Foundations: Avoid Self-Dealing

The following are considered permissible for qualifying distribution payments:

  • Grants
  • Costs of all direct charitable activities
  • Program-related investments and loans
  • Administrative expenses necessary for the conduct of its charitable activities
  • Asset purchases for carrying out charitable activities (such as furniture or computers)
  • Program-related investments and loans

If a private foundation fails to make a qualifying distribution, the IRS imposes a hefty penalty (a 30% excise tax) on the funds a private foundation fails to distribute.

What’s the Difference Between Public Charity & Private Foundation

The More You Know

An important caveat to the qualifying distribution requirements is that a foundation may elect to set aside funds for up to 5 years for certain major projects. Furthermore, excess qualifying distributions may be carried forward for a period of five tax years immediately following the tax year in which the excess was created.

Nonprofit Need to Know: File the Iowa Biennial Report

Leader Liability

Foundation managers should be aware that while the penalty is imposed on the foundation, individuals may also be charged penalties on the grounds s/he failed to exercise fiduciary duties.

Let a Lawyer Help

With all of that said, this is why it’s a smart (even essential) idea to enlist an attorney well-versed in the intricacies of nonprofit law to serve as a guide at different steps throughout the life cycle of a private foundation, from formation to board building, to continued compliance.

employees talking

Questions? Want to learn more about how to make certain your private foundation is set up for success from the start? Don’t hesitate to contact me for a free consultation. You can also download my free, no-obligation nonprofit formation guide!

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Nonprofit Events & Opportunities in January and February 2020

agenda on table

Martin Luther King Jr. Day and Valentine’s Day aren’t the only days worth recognizing in January and February. I like to help spread the word about all the awesome events, awards, and grants available in Iowa. There are so many great opportunities for nonprofit pros, board members, volunteers, and donors, that range from seminars to galas. But, life is busy, and it can be hard to keep track of what you should register for or put on your calendar. That’s why I compiled a list for your convenience!

Learning Seminars, Trainings, & Workshops

  • 1/9/20; 1/23/20; 2/6/20; 2/20/20; 3/5/20 – Hosted by Volunteer Iowa: “The online Volunteer Management series will enhance best practices training and provide a consistent curriculum to be used within your organization. The webinar series is live, interactive, and the online classes are presented by leading experts across the state. Registration fee to attend all six sessions: $125.”
  • 1/15/20 – Head to Cedar Rapids for “Nonprofit Know-How: Grants at the Community Foundation in 2020.” A taco bar followed by a panel discussion to offer insights about the grantmaking process at the Greater Cedar Rapids Community Foundation. Panelists include a former grant committee member, a former grant writer, and Community Foundation Program Officers. The event will also include a review 2020 grant opportunities at the Community Foundation for local charitable nonprofits that provide services in Linn County.
  • 1/21/20- At the Des Moines Fundraising Institute’s “Capital Campaigns I” class, participants will develop a framework for building a successful campaign that includes planning, timelines, and resources. This session will explore feasibility studies, hiring outside counsel, and creating a case statement for the campaign.
  • 1/22/20- Nonprofit staff and volunteers who have social media and digital marketing duties or those who are interested in exploring social media may want to register for “How to Succeed in Social Media in 2020 and Beyond” at Junior Achievement in Des Moines.
  • 1/28/20- Nonprofit professionals (executive directors, program staff and others) that train adult learners may want to register for “Train the Trainer” session covering everything that goes into planning a successful training session. Attendees will receive all the slides, handouts and a Train the Trainers toolkit. Morning coffee, snacks and lunch will be provided.
  • 2/17/19- At the Des Moines Fundraising Institute’s “Capital Campaigns II” class, attendees will focus on the implementation of the plan including the private and public phases of the campaign, unrestricted and restricted giving (purpose and time), pledge payments, and complex gift vehicles including blended gifts.
  • 2/29/20 – “Equity by Design: Using Equity-Centered Community Design to Co-Create Community-Engaged Projects” workshop will be hosted at Grinnell College by Iowa Campus Connect. The workshop is open to faculty, staff, community members/organizations, and students interested in beginning to develop a framework for their own collaborative community projects.

Events

Grants/Scholarships

  • 1/24/20 – Iowa & Minnesota Campus Compact is seeking host sites for next year’s VISTA Community Corps program, which strives to eliminate poverty through community-campus partnerships by placing full-time capacity-building support in nonprofit organizations and higher education institutions. Deadline for applications is January 24.
  • 1/31/20- Applications are due at the end of January for the Bank of America Student Leaders Program, which connects community-minded high school juniors and seniors with paid summer internships with local nonprofits and a national leadership summit in Washington, D.C.
  • 1/31/20- Each year, dsmHack holds a 48-hour hackathon to help a local nonprofit organization solve their technology problems. This flagship event connects technology enthusiasts including developers, designers, and project managers and partners them with nonprofits selected through an application process. Nonprofit applications are open through January 31.
  • 2/28/20 – Prairie Meadows Community Betterment Grants fund small-to-medium-sized projects with grants ranging from $100 to $99,999. These grants support qualified organizations seeking to improve the lives of those in their communities. Submissions are due by February 28.

There are so many great events and opportunities for nonprofits and the people that advance them that there is no doubt I missed some in the list above. Don’t hesitate to email me at gordon@gordonfischerlawfirm.com to notify GFLF of any upcoming nonprofit-focused events and opportunities in the coming months.

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Nonprofit Events & Opportunities in April 2019

blackboard

April Fool’s and Easter aren’t the only days to look forward to in April! I like to help spread the word about all the awesome events, awards, and grants available in Iowa. There are so many great opportunities for nonprofit pros, board members, volunteers, and donors, that range from webinars to workshops. But, life is busy, and it can be hard to keep track of what you should register for or put on your calendar. That’s why I compiled a list for your convenience!

Learning Seminars, Trainings, & Workshops

  • 4/2- For those on the western side of the state of Iowa, young professionals can take advantage of the opportunity to learn about what it means to serve on a nonprofit board at this Board Training (in Omaha) presented by Share Omaha.
  • 4/3- Still not sure how search engine optimization can help your nonprofit, or what it is? Cedar Falls-based Red Lab Technologies will be helping the Community Foundation of Northeast Iowa Marketing Meet Up group get answers and solutions to these questions and more.
  • 4/4- Attend the Central Iowa Chapter of Grant Professionals Association, “In It to Win It – Grant Writing, Management, and Everything in Between” workshop at DMACC. Pro grant trainers Johna Rodgers, GPC, and Amanda Day, GPC, share their knowledge of grant writing, management, and other topics.
  • 4/4- The Minnesota Planned Giving Council will lead community foundation participants in a one-day seminar through the nuts and bolts of planned giving instruments and strategies at the Greater Des Moines Botanical Gardens. Registration is $25 per participant.
  • 4/9- Cedar Valley Nonprofit Association is hosting SuperSTAR Supervision to enhance your professional skill repertoire while heightening the intentionality of your supervision through the sharing of tips and strategies to make you a S.T.A.R. in your most important role. Presenter: Dr. Beth Triplett, Leadership Dots.
    Free for CVNA members/$25 non-members.
  • 4/9- The Association of Fundraising Professionals Eastern Iowa Chapter is hosting a program highlighting the Eastern Iowa successes with giving circles that reflect the generosity of community members and may offer insights into giving preferences of a relatively untapped demographic. Learn more from Leighton Smith, who helped found the Hawkeye Chapter of 100+ Men Who Care, which surpassed $500,000 in total cash contributions this past November.
  • 4/15- Hosted by World Renew in Pella, “Helping that Helps” workshop attendees will hear stories from practitioners, best practices from each other, and be inspired to confidently partner both locally and globally in a way that provides hope instead of unintended harm.
  • 4/25- For the quarterly membership meeting of the Iowa Council of Foundations, head to NewBoCo for an interactive session on how Power Moves can help you redefine risk to more effectively build, share and wield power for equity and justice.
  • 4/30- Here’s a great event in Des Moines: “A Fairytale for Fundraising: Storytelling Strategies to Inspire Donations.” The workshop is for nonprofit staff and board members who want to make a connection between marketing and development functions, lead fundraising or promotional efforts for the organization or want to gain a better understanding of how they can be an ambassador for their organization by telling the story of impact and opportunity. The cost to attend is $30 and the event will be held at Junior Achievement in Des Moines.

Events

  • 4/4- UNI’s Nonprofit Leadership Alliance Student Association hosts the15th Annual Cedar Valley Nonprofit Awards Luncheon to recognize the contributions of local nonprofits and nonprofit leaders.
  • 4/5- Put a spring in your step with eight rounds of trivia in Iowa City to benefit a community non-profit, the Antelope Lending Library Bookmobile.
  • 4/6- Join the Clinton Committee at the 24th Annual Clinton Benefit: Red, White, and Blue make wishes come true to benefit Make-A-Wish Iowa.
  • 4/6- Hops for Housing is a fund- and awareness-raising event at NewBo City Market to benefit Willis Dady Homeless Services, which provides shelter and prevention services to homeless and near-homeless households in Linn County. The event will feature beers from 35-40 local, state, national, and international breweries. Tickets are $30 in advance and $35 at the door.
  • 4/12- Eastern Iowa Corridor wine and beer tasting event, Uncork A Wish, returns to Cedar Rapids. All proceeds will go to Make-A-Wish Iowa to help grant wishes for children with life-threatening medical conditions.
  • 4/25- Attend the spring banquet benefiting the Dubuque Dream Center. The theme is Impacting Youth. In the keynote, “Telling Our Story,” teachers, parents & students will share how the Dubuque Dream Center has impacted lives and the Dubuque community. An individual ticket for this event is $75 and a table of 8 is $600.
  • 4/26- Putts for Prevention is an exciting and fun nine hole putt-putt course located at all of your favorite downtown eateries in Cedar Rapids. Your day will start at Greene Square Park and follow the course of restaurants and bars. The best part? The proceeds will go to Foundation 2 and support crisis services and suicide prevention efforts.

Grants

First Day of the Season: Spring Ahead with Nonprofit Success

There are so many great events and opportunities for nonprofits and the people that advance them that there is no doubt I missed some in the list above. If you would like to notify GFLF of any upcoming nonprofit-focused events and opportunities in the coming months, don’t hesitate to email me at gordon@gordonfischerlawfirm.com.

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What’s the Difference Between Public Charity & Private Foundation

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Holding lights

Since 1968, every Section 501(c)(3) organization is classified by the IRS as either a private foundation or a public charity. This classification is crucial for at least two reasons to anyone considering forming a nonprofit or anyone considering making a significant donation to a nonprofit.

First, private foundations are subject to much stricter regulations than public charities. Second, public charities receive more favorable tax treatment than private foundations. Let’s explore each classification a little deeper.

Public Charities

heart ceramics bowls

Public charities must attract broad donor support. Some organizations—churches, schools, and hospitals for instance—are by their very nature considered “publicly supported.” Other organizations must pass mathematical public support tests to qualify as a public charity. These tests require charities to obtain funding from numerous sources, rather than one singular source, or a small group of related funders.

When a charity passes one of the public support tests, it is demonstrating to the IRS that the general public (non-insiders) evaluated the charity’s performance and found it worthy of financial support. As a result, such charities are treated as having a sort of stamp of approval of the general public, lessening the need for the stricter IRS scrutiny applied to private foundations.

Private Foundations

Do something great in neon

Private foundations are funded by an individual, a family, a company, or a small group. Two prominent examples would include the Ford Foundation and Bill & Melinda Gates Foundation.

Private foundations are subject to a more strict regulatory scheme than public charities. There are penalties for self-dealing transactions, failure to distribute sufficient income for charitable purposes, holding concentrated interests in business enterprises, and making risky investments. The IRS recognizes two types of private foundations: private non-operating foundations and private operating foundations. The main difference between the two? How each distributes its income:

  • Private nonoperating foundations grant money to other charitable organizations.
  • Private operating foundations distribute funds to their own programs that exist for charitable purposes.

In general, private foundations can accept donations, but many do not and instead have endowments, as well as invest their principle funding. The income from the investments is then distributed for charitable activities/operations.

Deduction limits

Contributions made to public charities and private foundations may be deducted from the donor’s federal income tax. The amount of the deduction is subject to certain limits under federal tax law.

Money and receipts

Gifts to public charities receive more favorable tax treatment than gifts to private foundations—this includes donor limits. For example, a charitable cash donation to a public charity would be deductible at up to 50 percent of the taxpayer’s adjusted gross income (AGI), but the same gift to a private foundation is deductible at a rate of only 30 percent of AGI.

A word on the word “foundation”

Don’t assume that an organization with “foundation” in its title/name is indeed a private foundation and not a public charity. Of course, it could be, but many types of nonprofit organizations have adopted “foundation” as part of their name to help project a mission and/or identity. (Examples include Friends of Animal Center Foundation and the Iowa City Public Library Friends Foundation.) If you’re entirely unsure if a nonprofit you’re considering donating to is a private foundation or public charity, simply ask one of the nonprofit’s executives or appropriate contact.

If you’re wanting to make a complex gift or include nonprofits as beneficiaries in your estate plan it’s wise to work with an attorney experienced in those areas. Of course, I would be happy to help.

Have any questions? Want to discuss your charitable donation or formation of your dream nonprofit? Contact me by email or phone (515-371-6077) .

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