Foundation basics

What are the tax benefits of a private foundation?

Tax benefits

The most direct benefits for the founders and funders of private foundations relate to the U.S. tax system.  Here is a listing of some of the most important tax advantages:

  • Donors can claim a current-year tax deduction for donations to the foundation. Contributions of cash are deductible up to 30% of AGI while contributions of appreciated securities are limited to 20% of AGI. A five year carry forward of any remaining deduction is available.
  • It is possible to amplify the power of the current-year tax deduction by donating appreciated public securities because a tax deduction is typically allowable at current market value rather than historical cost basis (i.e., the original purchase price).
  • Even though the tax deduction for the contribution occurs in the year of the donation, the foundation has the choice of immediately paying out the entire amount in the form of a grant, or it can spread the grantmaking out over time and pay the funds out over multiple years (subject to the 5% annual distribution requirement).
  • As time goes on, the foundation can replenish its endowment by receiving additional contributions from family members or third parties. This provides the donor with a tax deduction at that time.
  • The donor reduces estate tax exposure by reducing the size of their taxable estate.
  • Investment income and appreciation of the foundation’s endowment are nearly tax-free (the tax rate is 1.39%). There is a reasonable chance that the foundation can grow its endowment, which is possible if the after-tax investment return is greater than the 5% annual distribution requirement. 

Do private foundations get tax breaks so rich people can avoid taxes?  

No, private foundations are not considered a tax shelter or a cunning way to reduce individual taxes. Rather they are a legitimate and transparent vehicle used by wealthy individuals and families to give to charity and promote the public good. The tax benefits provided by foundations are very similar in scope to the tax benefits anyone can claim for donating to a public charity or religious organization. 

Are contributions to foundations tax deductible? 

Yes, contributions to private foundations are generally tax deductible. There are, however, restrictions on the deductible amount that depends on the income of the donor and whether the donation was in cash or a non-cash item like a public security. 

Do foundations pay capital gains tax?

Private foundations must pay income tax when they sell property at a gain. However, there is no special capital gain tax rate and there is no cost distinction between a short and long-term gain. The standard tax rate for any income generated by private foundations is 1.39%.  

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Foundation basics