Wednesday, February 23, 2011

Private Operating Foundations

Wednesday, February 23, 2011 0
Many of us are familiar with private foundations, which are basically charitable organizations that are “privately” funded. They do not rely heavily (and sometimes not at all) on contributions from the public, as does a publicly supported charitable organization. Many private foundations are family foundations or are set up after an individual passes away with the assets from the estate. This standard type of private foundation will provide grants directly to other charitable organizations that will use those funds to carry out the charitable activities or programs.

A private “operating” foundation on the other hand, while still being privately supported or funded, will actively conduct charitable programs or activities rather than simply distribute funds to other organizations for those purposes. Thus, a private operating foundation sponsors and manages its own programs. A typical example of this would be a day camp for underprivileged children. Rather than providing grants to another organization to administer such a camp, which a standard private foundation would do, the private operating foundation will actually “operate” the camp. The private operating foundation will maintain a qualified staff as well as other personnel needed to carry out the program on a continuing basis. The private operating foundation meets its required annual charitable distribution requirements by making these types of payments to accomplish its tax-exempt purpose.

A private foundation qualifies as a private operating foundation by satisfying two numerical tests. These tests ensure that the private operating foundation is conducting its exempt activities directly and not simply making grants to other organizations. The first of the two tests is an income test, which requires a specific amount of income to be spent on direct charitable activities. The second test is actually made up of three different tests, an asset test, an endowment test and a support test. However, the private operating foundation only has to satisfy one of these three tests, in addition to the income test to qualify. Similar to the income test, these other three tests help to ensure that the private operating foundation is using its funds to meet the requirement of conducting direct charitable activities.

When the private operating foundation files its annual Form 990-PF, these tests are applied for the current year and the three preceding years. There are two methods that the foundation can use in order to show that it meets the tests and qualifies as a private operating foundation. Under the first method, the foundation can aggregate all four years, showing that over the four year period it met the income test and one of either the asset, endowment or support tests. For the second method, if the foundation can meet the income and one of the other tests for three out of four years standing alone, they would continue to qualify as a private operating foundation. Based on these tests, if the foundation fails to qualify as a private operating foundation for any year, it is treated as a standard private foundation for that year. It can return to being a private operating foundation in the year that it again qualifies under the income and asset, endowment or support tests.

Why would a private foundation want to qualify to be or go through the trouble of trying to meet the bevy of tests necessary to be considered a private operating foundation? The first advantage of a private operating foundation over a standard private foundation is that for any donors, the contribution deduction limits are higher if the contribution is made to a private operating foundation. In this case, the private operating foundation limitations are the same as they are for public charities. Contributions to private operating foundations can shelter up to 50% of a donor’s adjusted gross income. Contributions to a standard private operating foundation can only shelter up to 30% of the donor’s income. This could be an important factor for potential donors. Another advantage is that both standard and operating private foundations have minimum distribution requirements, however, in many cases, the distribution requirement will be lower for a private operating foundation. One disadvantage for a private operating foundation is that it does not have the one year time delay for making its required distributions that a standard private foundation is allowed. Once a standard private operating foundation calculates its minimum distribution requirement for a particular year, it has until the end of the following year to satisfy this requirement. A private operating foundation must satisfy its tests as of the last day of a particular year or cumulatively for three out of four years.

Since the qualification as a private operating foundation is based on numerical tests, there should be no requirement for Internal Revenue Service (IRS) approval for a switch to or from a private operating foundation. However, when we recently converted a standard private foundation to a private operating foundation, we sought out and received IRS approval and a revision of the determination letter. The foundations directors and trustees may also want the comfort of a formal IRS approval.

You may want to review the status of any private foundations you are associated with to determine if they could possibly qualify as a private operating foundation. Once the foundations activities have been reviewed, a determination can be made as to whether a conversion is warranted, and then you can move ahead with the proper plan. For more information about private operating foundations, please contact me.

Tuesday, February 8, 2011

Small employer health care tax credit

Tuesday, February 8, 2011 0
Many of my small nonprofit clients have been asking about a postcard they received from the IRS regarding a new tax credit for providing health insurance for their employees. What I’ve told them was millions of small employers received these postcards from the IRS last year alerting them to the new small business health care tax credit, and encouraging them to check their eligibility. Whether or not you received this postcard, I encourage you to check your organization’s eligibility. I’ve outlined some of the basic criteria below (there are much more specific criteria as you can imagine with the IRS). In general, the tax credit is available to small employers that paid at least half the cost of single health care coverage for their employees in 2010. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low- and moderate-income workers afford the cost of health insurance for their employees.

Who is eligible for the health care tax credit?

  • A qualifying employer who covers at least 50% of the cost of health care coverage for some of its workers based on the single rate
  • A qualifying employer who has less than the equivalent of 25 full-time workers (e.g. an employer with fewer than 50 half-time workers may be eligible)
  • A qualifying employer who pays average annual wages below $50,000
What is the amount of credit for tax-exempt organizations?

  • 2010 – 2013: maximum credit is 25% of premiums paid by employer
  • 2014: maximum credit increases to 35% of premiums paid by employer
  • Phase-out – the credit phases out gradually for organizations with the equivalent of between 10 and 25 full-time workers and for organizations with average wages between $25,000 and $50,000.

How can my tax-exempt organization claim the credit?

  • Small employers, including tax-exempt organizations, will use new Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the refundable tax credit
  • Tax-exempt organizations will claim the credit on Line 44f of revised Form 990-T, Exempt Organization Business Income Tax Return. Form 990-T will be used by eligible tax-exempt organizations to claim the credit, even if they are not subject to tax on unrelated business income.
The following is an example of the tax credit calculation for a tax-exempt organization:

  • Employees: 9
  • Wages: $198,000 total, or $22,000 average per worker
  • Employee Health Care Costs paid by the Employer: $72,000


  • 2010 Tax Credit: $18,000 ($72,000 x 25%)
  • 2014 Tax Credit: $25,200 ($72,000 x 35%)
To determine whether your organization is eligible for the new health care tax credit and how large a credit your organization can potentially receive, please contact Elko & Associates. We are offering a complimentary analysis to determine your eligibility. If we find that you are eligible, we would be happy to discuss the details of preparing the necessary tax forms for you.

Nonprofit After Hours ◄Design by Pocket, BlogBulk Blogger Templates