Many people want to serve others’ needs, but not everyone has the ready means to enact change. Out of people’s altruistic desires came organizations that provide the structure for them to help in meaningful ways. There are many methods of doing good. For-profit companies donate according to a buy-one, donate-one model, companies volunteer together, the public can donate to a charity, and individuals can start a private foundation. The latter two categories are referred to as public charities and private foundations. These are commonly confused, though, so make sure you have it right by reading our guide to public charities vs. private foundations.
How They Receive Support
A hallmark difference lies in how private foundations and public charities receive resources.
Public Charities’ Support
Public charities solicit broad public support to fund and supply their work. In fact, they must do this. After a public charity’s first five years, they must show they passed a public support test. The proportion of public support isn’t universal; in general, charities must receive one-third of their total financial support via public donation and not more than one-third of their support from investment interest or gains. With the Facts and Circumstances Test, the organization must show at least ten percent of their income comes from public money. This test is not the primary tool to determine 501(c)(3) eligibility, but some organizations retain their status under this test.
Private Foundations’ Support
Private foundations receive money through a very different mechanism. They do not ask for any public support. Instead, an individual or small group establishes a foundation with their own funds and investments. Naturally, if you aren’t one of a couple of people setting up a foundation, you’re not likely to donate.
Meanwhile, private and public organizations also differ in how they put their resources to use.
Public Charities’ Work
Public charities create, fund, staff, and supply outward-facing programs that tangibly serve people. This allows charities to not only collect money and other resources in one central organization, but also turn those resources directly into programs. This allows them, the passionate experts in their field of service, to build sensible programs that service certain populations well by paying attention to appropriate nuances.
Private Foundations’ Fund-Channeling
Private foundations lack these internal programs. A foundation’s approach is to gather resources and then divvy them out to charitable organizations (including public charities) that have existing counseling, conservation, shelter, or other programs that fulfill the foundation’s mission. Once you set up a foundation, one attractive facet is your high degree of control over your funds. Rather than giving to a charity that has their own preconceived plans and decision-making board, housing your money in a foundation gives you a voice to meet the needs you care about.
Nonoperating vs. Operating Foundations
That said, some foundations do enact their own programming. These are operating foundations, whereas nonoperating foundations fit the conventional definition of a foundation that only sends funds to other places. To classify as an operating foundation, these organizations must put a certain portion of their resources towards their programs each year, much like a public charity.
How Donor Taxes Work
Another difference between public charities and private foundations is how donations function and how they affect your taxes.
Public Charities and Donor Taxes
As a member of the general public, you can only donate to a public charity. When doing your taxes, if you choose to itemize your deductions, donating to a charity rather than using your money for a foundation changes how much you’ll receive back. It’s entirely likely you won’t itemize your deductions if your donation total isn’t very high. Basically, if your donations plus your other itemizable deductions don’t exceed your standard deduction—$12,200 for a single filer and $24,400 for married filing jointly—you don’t need to itemize. However, if your total deductions do exceed that amount, reporting your donation total on your taxes will allow you to recoup some money. One benefit of donating to public charities is you can get up to 50 percent of your adjusted gross income back with your tax return.
Private Foundations and Donor Taxes
On the other hand, though you can’t donate to a foundation, starting one comes with its own tax benefits. Foundation investors receive up to 30 percent of their adjusted gross income come tax time. While this is less than 50 percent for donating to a charity, the control you retain over your donated money may make it worthwhile to go this route.
How/If They Pay Taxes
While foundations and charities each commonly qualify as a 501(c)(3) non-profit organization with the IRS, the way they handle taxes differs. Essentially, charities don’t pay taxes on what they take in and foundations pay a two percent excise tax. If foundations demonstrate that they donate responsibly, they can lower this to one percent.
To further draw out the differences between charities and foundations, it’s important to discuss the several types of public charities and private foundations.
Types of Public Charities
There are supporting organizations and donation-focused, income-focused, and statutory public charities. Supporting organizations are charitable arms of existing organizations, such as a service-centered program attached to a hospital. Donation-focused entities are common and defined by their need to solicit public donations for funding. Dissimilarly, income-focused charities can legally fund themselves through certain kinds of income. For example, they can charge admission to events. Meanwhile, statutory charities such as a church or research center gain their status due to existing laws rather than their received donations or funding. One warning—some charities go by the name “foundation,” meaning the name isn’t a pure indicator of status.
Types of Private Foundations
Private foundations come in many forms as well. Independent foundations start from one or a handful of people, while family foundations include family members in funding and managing the foundation. Corporate foundations, on the other hand, get their start when an entire company establishes an endowment. Finally, international foundations operate outside the U.S. and the money invested does not qualify for a tax deduction.
If you would like to get involved in your local community, you have several options. You can donate to a public charity at any time or, if you set aside the necessary funds, you can establish your own foundation. If you want to donate, consider gifting bulk wholesale toys or any other quality wholesale product through Backpacks USA to a charitable organization that needs your help serving people.