Qualify as a Private Operating Foundation
At Online Stewardship Accounting & Consulting Services, we regularly receive inquiries about establishing and maintaining IRS code Sec. 501c3 entities.
Most people assume 501c3 entities to be only traditional public charities. With the primary recurring test being one-third of annual revenue derived from general public contributions, nonprofit entities sometimes find trouble continually qualifying as a public charity.
Another alternative to consider is the qualified private foundation, which also falls under Section 501c3. These groups divide into two major categories: operating and non-operating foundations.
The benefit of the private operating foundation (POF) is it may receive charitable contributions qualifying for the 50% limit itemized deductions (instead of 30% or even 20%) and it’s not subject to the required annual distributions rule based on investment assets to avoid the 1% or 2% investment income tax.
To qualify, an organization must pass the income test and one of three alternative tests:
1) Income test:
- Spend at least 85% of operating and investment income on exempt activities
- At least 75% of governance is by general public;
- Have no disqualified officers (not a substantial contributor, 20% or greater owner of a contributing entity, or family member who holds such control).
2) Alternative tests:
- Assets test – 65% or more of assets used for exempt purpose
- Endowment test – 65% or more of minimum investment return used for exempt purpose
- Support test – 85% or more of support from general public and five or more exempt organizations
- Certain elder care facilities
3) Must meet tests over a four-year period – either in aggregate over four years or individually in three of the four years.
New foundations must pass the income test plus one of the three alternative tests in the first year. These groups may continue their exempt status if the tests are met in each of the next two years. After the third year, the four-year rule applies. The IRS will consider a good faith effort as an alternative if the group shows it will meet the requirements in the future.
An organization’s Form 1023 application must state its intent to qualify as a POF on Part X. The statement must include:
1) Supporting information to confirm determination, and
2) A written declaration by a principal officer, manager or trustee to prove a basis in law, confirm POF status and, to the best of his or her knowledge and belief, all information is complete and correct.
The IRS must confirm POF status before it can be claimed.
For more information link to: http://www.irs.gov/Charities-&-Non-Profits/Private-Foundations/Private-Foundation-Classification:-Statement-that-organization-is-a-private-operating-foundation.
Interested in establishing a POF? The OSA&C team can help. Contact us at: Lynn@onlinestewardship.com or 904-398-4747.
