Private Foundation Vs Supporting Organization - What's the Difference & Which Should You Choose?

You know what a private foundation is, but what in the world is a supporting organization? And how do they relate to each other? Read on to find out.

First of all, the biggest difference is that while private foundations are, by definition, private, supporting organizations are public charities. As such, they are not subject to the more restrictive rules and limitations that apply to foundations, specifically ones that don't actually administer their own programs (called non-operating foundations).

Here is an example: When a cash contribution is made to a supportive organization, it is deductible up to 50% of the donor's adjusted gross income. In contrast, a cash contribution made to a private foundation can only be deducted up to 30% of the donor's adjusted gross income.

When you contribute appreciated assets, such as real estate or stock, to a supporting organization, these assets are deductible at full fair market value up to 30% of the donor's adjusted gross income. In contrast, these same contributions made to a non-operating foundation are only deductible up to 20% of the donor's adjusted gross income. Not only that, but the deduction is only available if the appreciated asset is "qualified" stock, which essentially means that it consists of publicly trades shares.

In addition, supporting organizations are technically "public" charities. As such, they are subject to the "intermediate sanction" rules that apply to public charities. On the other hand, private foundations are subject to the more onerous private foundation operating rules under Code Sections 4940 through 4945. These draconian rules include the following:

1. A 1% to 2% tax on net investment income; 2. An excise tax if at least 5% or more of the value of the foundation's investment assets are not distributed annually; 3. An excise tax (which is really nothing more than an income tax in disguise) on "jeopardy investments." 4. An excise tax on "self-dealing," which is a very broadly defined set of no-no's that include prohibitions of transaction between the foundation itself and certain insiders. The prohibited transactions are far reaching and include certain sales, loans, compensation and providing services or goods between the foundation and certain family members, contributors or foundation managers. 5. Excise taxes on taxable expenditures, e.g., payments to persons or entities other than qualified public charities.

Supporting organizations are not subject to all these limitations. So if you're thinking of setting up a foundation, you may want to learn more about the various options you have, and specifically be sure to include supporting organizations in your considerations.