Public Charities vs. Private Foundations: Key Accounting Differences

Nonprofit organizations play a vital role in addressing societal needs, but not all nonprofits are structured the same way. The two primary categories — public charities and private foundations — differ significantly in their funding sources, operational models and regulatory requirements.

For professionals working in the nonprofit sector, or aspiring nonprofit founders, understanding these distinctions is crucial for ensuring compliance, maximizing tax benefits and effectively managing resources.

What Are Public Charities?

Public charities are the grassroots organizations of the nonprofit world. You see them in your community running food banks, operating animal shelters or providing after-school programs.

These organizations get their funding from a mix of sources. Individual donors, government grants, corporate sponsorships… they cast a wide net. This diverse funding base helps them stay flexible and responsive to community needs.

To maintain their status, public charities must pass an annual public support test. They need to show that at least 33.3% of their support comes from the general public or government sources. If they fall short, they may qualify under a facts and circumstances test if they receive at least 10% from these sources. This test ensures they’re truly serving, and supported by, the community.

What Are Private Foundations?

Private foundations are typically funded by a single source — often a wealthy individual, family or corporation. Organizations like the Bill and Melinda Gates Foundation or the Ford Foundation are examples of notable private foundations.

There are two main types of private foundations:

1. Operating foundations run their own programs, such as research institutes.
2. Non-operating foundations primarily give grants to other organizations.

Public Charities vs. Private Foundations: Funding Differences

Public charities and private foundations receive funding in different ways, and that can have an important impact on the way they operate.

Public charities benefit from diverse funding, which can provide stability and community engagement. But it also means they’re always fundraising, juggling different grants and trying to please various stakeholders.

Private foundations, with their single funding source, have more control and consistency. They can plan long-term initiatives without worrying about the constant fundraising cycle.

Tax Implications

Private foundations pay a 1.39% excise tax on their net investment income, reportable on Form 990-PF. Quarterly estimated tax payments must be made if the total tax for the year is expected to be more than $500. Private foundations are also required to distribute 5% of the net value of their non-charitable use assets annually for charitable purposes. This ensures they’re actively using their resources for good, not just hoarding their funds

Public charities don’t face these specific requirements. However, they need to ensure all their activities align with their charitable purpose to keep their tax-exempt status.

Donor tax deductions also differ. Donations to public charities can be deducted up to 60% of a donor’s adjusted gross income (AGI) for cash gifts and up to 30% for appreciated property.

For private foundations, these limits are lower, with a 30% deduction for cash donations and 20% for appreciated property. This difference can significantly impact fundraising strategies, since it’s more attractive for individual donors to contribute to a public charity.

Operational Focus

Public charities are often on the front lines, directly serving their communities. They’re running programs, providing services and engaging with the public daily. This direct approach can lead to immediate impact, but it also requires careful management of program costs and grant compliance.

Private foundations, especially non-operating ones, focus more on strategy and grantmaking. They’re the behind-the-scenes players, funding initiatives and research that align with their mission. This approach allows for a broader reach but requires sophisticated investment management and grant oversight.

Governance Implications

The governance structures of these organizations reflect their different approaches.

Public charities typically have a diverse board representing community interests. The IRS requires at least three board members, with a majority being independent. These boards need to balance various stakeholder interests and maintain transparency in their operations.

Private foundations often have smaller boards — sometimes just family members or close associates of the founder. This can lead to quicker decision-making and a consistent vision. However, it also means they need to be diligent about avoiding conflicts of interest and self-dealing transactions, which are strictly prohibited.

Financial Management

Both types of organizations face unique financial management challenges.

Public charities often grapple with irregular cash flows, complex grant compliance requirements and the need to accurately allocate costs across various programs. They also need to carefully track and report expenses to maintain public trust.

Private foundations focus more on endowment management, ensuring they meet distribution requirements while also growing their assets for long-term sustainability. They also need to carefully calculate and report their excise taxes and be vigilant about preventing self-dealing transactions.

Compliance Requirements

Both public charities and private foundations have significant reporting requirements, but the details differ.

Public charities file Form 990, 990-EZ or 990-N, depending on their size. These forms require detailed reporting on revenue sources, expenses, governance and key employee compensation.

Private foundations file Form 990-PF, regardless of their size. This form demands even more detailed reporting, including a complete list of investments, information on grants awarded and calculations of net investment income and excise taxes.

Both types of organizations may also need to file a Form 990-T if they have unrelated business income. Both also face varying state reporting requirements, often including filings with the attorney general’s office. They must make their tax forms available for public inspection, with private foundations often facing additional disclosure requirements.

The Bottom Line: Public Charities vs. Private Foundations

Understanding the distinctions between public charities and private foundations is essential for nonprofit leaders. These differences impact everything from funding strategies and tax implications to governance and compliance requirements. By grasping these nuances, professionals can ensure compliance, optimize financial health and fulfill their organization’s mission effectively.

If you need support managing your nonprofit’s taxes, financial management or compliance obligations, James Moore can help. Our team of nonprofit CPAs can help you guide your charity or private foundation toward a financially healthy future. Contact us to learn more about how we can help you set your organization up for an even greater impact.

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