Supporting organizations, like private foundations, are often established and funded by a single individual or family. Unlike private foundations, however, supporting organizations are afforded many of the benefits of being a public charity, while avoiding the taxes and regulations imposed on private foundations by IRC Sections 4940 through 4948.
A supporting organization that meets the requirements of IRC Section 509(a)(3) is distinguished from a private foundation in that it serves public, rather than private, purposes; it’s this public focus that justifies the organization’s status as a nonprivate foundation.
Creating a Supporting Organization
A supporting organization is typically created as a charitable trust. Occasionally, the donor sets up the organization as a nonprofit corporation under local (state) law. At least one public charity (university, hospital, museum, etc.) must be identified in the organizing document as a recipient of the new organization’s support. Frequently, the creator and his or her family serve as trustees or directors of the supporting organization, along with representatives of the charities named.
Qualification as a Supporting Organization
The following three tests must be satisfied:
- The supporting organization must operate exclusively for the benefit of one or more specified public charities.
- It must be operated, supervised, or controlled by or in connection with one or more public charities.
- The supporting organization must not be controlled-directly or indirectly-by a disqualified person, as defined in IRC Section 4946.
Tax Treatment of Supporting Organizations
Generally, a supporting organization is accorded the benefits of being a public charity, including the following:
- Income tax deduction for gifts. Gifts of cash to a supporting organization-as with a public charity-are deductible up to 50 percent of the donor’s adjusted gross income in the year of contribution. Any unused deductions may be carried forward up to five years. Gifts of appreciated property held long term are deductible from the donor’s table income at full market value, up to 30 percent of the donor’s adjusted gross income, with a five-year carry forward of any unused deductions.
- Not subject to private foundation excise taxes. Specifically, the prohibitions against self-dealing, minimum-distribution requirements, taxes on net-investment income, excess business holdings jeopardizing investments, and prohibited expenditures don’t apply to supporting organizations.
Control Issues
While many individuals focus on the tax benefits of charitable giving, other donors are concerned with the loss of control over money and property gifted to a charity. For such patrons, the private foundation is usually the preferred means of achieving philanthropic goals. The greater control found in a private foundation comes at a cost-in the form of greater tax restrictions and increased regulation.
While the creator of a supporting organization doesn’t have the same level of control as the individual who establishes a private foundation, he or she can still have a significant voice in the organization. From a practical standpoint, the supported charities carefully consider the opinion of the ultimate source of their support.
Family Participation
An unspoken benefit of creating a supporting organization is the opportunity for donors to involve their children and/or grandchildren in directing the family’s philanthropic legacy to public charities in the community. By involving a younger generation in the organization, a donor is sometimes able to convey deeply held family values, while at the same time transferring funds to charitable causes.
As always, be sure to work with your financial advisors and tax attorney to consider the benefits of charitable giving for you and your family. AA!
