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Private Non-Operating Foundation

This probably isn’t a question you have been pondering unless you are exploring setting up a private foundation or are figuring out how you can use your assets to do good in a structured approach. A Private Foundation is a type of nonprofit organization, set up by individuals, families, or companies to use their assets to do good in this world via charity. However, this can be the private non-operating foundation. But what is it?

In this guide, we will discuss everything you need to know about Private Non-Operating Foundations, from what they are and what they can do, to examples of them and the deduction limits for donations. We will also cover their investment options, certain limitations and some key operating requirements.

What is a Private Non-Operating Foundation?

A Private Non-Operating Foundation, or PNOF, is a private foundation usually established by a single individual, family or company, and its purpose is to make grants to other qualified non-profits. Unlike a private operating foundation, a PNOF cannot engage in any business activities or directly run its own charitable programs. Usually a PNOF is set up by families or companies that want to be actively involved (they can even be paid employees of the foundation) with how their charitable funds are being used i.e. deciding who receives grants from the foundation, but they don’t want to manage the charitable activities themself.

What is the purpose of a Private Non-Operating Foundation?

The main purpose of a Private Non-Operating Foundation is to make grants to other charities and organizations. However, PNOFs are limited in how they can use their assets. They can only own cash and investments, and they cannot make any grants to for-profit organizations. Put simply, a PNOF will use its funds to benefit charitable programs but it will not run its own charitable events. An example, say you decide your charitable interest is focused on helping children in your area get access to proper equipment for outdoor sports. Your Private Non-Operating Foundation could make a grant to a local non-profit that focuses on exactly that, but it could not go out and buy equipment, set up an event, and then proceed to run that charitable event itself.

Why Do You Need A Private Non-Operating Foundation?

Firstly, you likely have considerable income or assets and want to maximize the effectiveness of the money you’ve made. Having a Private Non-Operating Foundation not only gives you the opportunity to save significant money on your taxes, it also allows you to use those proceeds to benefit the charitable causes you care about most. Most people who choose to set up a Non-Operating Foundation typically expect their Foundation to be large enough that its impractical to deploy their assets and efficiently run charitable programs themselves or simply want to minimize the overhead from their charitable endeavors but want to stay in control of how their resources are deployed.

In that same line of thought, the charitable causes you care about today may not be the same causes that your future generations care about. Having a PNOF allows those funds to be granted to other charities focused on the problems you care about most, while giving your heirs the optionality to change the charitable focus in the future.

Famous Private Non-Operating Foundations

Many of the more notable Foundations including the Ford, Packard and Rockefeller Foundations are classified as Private Non-Operating Foundations. Collectively they manage approximately $30b in assets and use those assets to benefit the charitable causes they care about.

You may be wondering why some of the largest Foundations decided to be Non-Operating Foundations instead of operating the charity programs themselves? The simple answer is imagine the scale and complexity associated with running a charitable program with $10 billion, that’s effectively the size of an S&P 500 company. Instead of having to deal with the tasks of managing those assets, choosing the charitable causes and programs you want to impact and operationally making that happen many large Foundations find it more efficient to focus. Instead Non-Operating Foundations essentially become more of a fund-of-funds for charitable programs, focusing on maximizing their endowment, picking the causes they want to impact and finding well run non-profits to invest in that can manage the implementation and charitable program operations.

How do charitable deductions differ for Operating and Non-Operating Foundations?

Donations to Private Non-Operating Foundations are usually limited to 30% of your adjusted gross income (AGI) for cash and 20% of your AGI for other assets. Just as critically or potentially, more importantly, non-cash donations are valued at their cost basis (not their current or appreciated value), except for publicly traded stock which is deductible at its market value. This often means your charitable deduction and tax write-off will be lower if you are looking at donating appreciated assets to a Non-Operating Foundation.

However, donations to public charities and private operating foundations, have more advantageous tax benefits. In most cases they are allowed to use the market value of donated assets to determine your charitable tax deduction and have higher AGI limits—60% for cash and 30% for non-cash donations. This means in most cases you can receive a higher deduction for appreciated assets donated to a private operating foundation and write off more of your income.

What taxes might a foundation pay?

There are a few different taxes that a foundation might have to pay. The most common is the net investment income tax. This tax is charged on the foundation’s net investment income – this is the income from investments less any expenses related to those investments. The tax rate for the net investment income tax is currently 1.39%.

The IRS will charge an excise tax to the IRS when a foundation transfers money out of its funds. This tax is paid by the recipient of the grant, and is used to help fund government programs. The excise tax is charged at a rate of 0.39%, meaning that for every $100 that a foundation transfers out of its funds, it will have to pay $0.39 in excise taxes. The excise tax is generally paid by the recipient of the grant, not the foundation itself.

How do Private Non-Operating Foundations differ from Private Operating Foundations?

The core difference between an Operating and Non-Operating Private Foundation is that an Operating Foundation can run its own charitable programs but there are other key differences.

Non-Operating Foundations:

  • Required to distribute annually at least 5% of the total fair market value of assets through grants to charitable causes
  • Limit the percentage of business enterprises it owns (essentially limited to cash and investment assets)

Operating Foundations

  • Must spend at least 85 percent of its adjusted net income or its minimum investment return (versus 5% of assets)
  • Can own business and non-cash or investment assets (generally they have more leeway with the assets they own)

Differences with Donor Advised Funds

A donor advised fund (DAF) is a type of public charity that allows individuals to make donations and receive a tax deduction for those donations. The individual then has the ability to recommend grants from the fund to other charities. DAFs are similar to Private Non-Operating Foundations in that they allow individuals to make charitable donations, receive an upfront tax deduction and must gift the money to other non-profits/charities in the future. However, there are some key differences:

  • PNOF must spend at least 5% of their assets on grants each year, while DAFs do not have a spending requirement.
  • DAFs are required to disclose their donors publicly, while private foundations are not.
  • PNOF can hire people, including family members, as employees to manage the foundations work while DAFs cannot

Next Steps

When it comes to charitable intent and a desire to run a foundation, you have options. In most cases, individuals who are focused on their careers and maximizing their earning will likely default to a Private Non-Operating Foundation. A PNOF allows you to preserve your capital versus paying more taxes, manage the assets to your liking, and make grants to the charitable causes you deem worthy without taking on the burden to setup and manage charitable programs yourself.

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