# How does a Private Foundation work?
**URL:** https://boards.straightdope.com/t/how-does-a-private-foundation-work/672220
**Category:** Factual Questions
**Created:** [October 25, 2013, 4:11pm UTC](https://boards.straightdope.com/t/how-does-a-private-foundation-work/672220 "2013-10-25T16:11:20Z")
**Posts on this page:** 8
**Page:** 1
### Author:  [@What\_the](https://boards.straightdope.com/u/What_the)
#### Post date: [October 25, 2013, 4:11pm UTC](https://boards.straightdope.com/t/how-does-a-private-foundation-work/672220/1 "2013-10-25T16:11:20Z")
Could it be used as a tax advantaged way to turn a personal cause or hobby into a money making/tax saving venture?
How hard is it to achieve status such that moneys you take in are considered charitable contributions?
What limitations are there on one person being the primary if not exclusive decision maker or even vendor (ex. travel expenses, office expenses, supplies, etc.)?
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### Author:  [@RealityChuck](https://boards.straightdope.com/u/RealityChuck)
#### Post date: [October 25, 2013, 5:26pm UTC](https://boards.straightdope.com/t/how-does-a-private-foundation-work/672220/2 "2013-10-25T17:26:25Z")
To be tax exempt, the money cannot go to anyone on the board of directors or to stockholders (profits can be kept and put into an organizational account, but not distributed except to cover legitimate expenses), the mission of the organization would have to fall withing tax-exempt guidelines, and the services of the foundation must be available to people who are nonmembers of the organization.
You could set yourself up as executive director – with a salary and provision for businesses expenses – but there would have to be a board overseeing you. Any income you make would be taxed.
If you took your income from other sources and gave it to the foundation, it would be tax deductible, but a portion of that money would have to go to program expenses. Even if you could figure out a way to pass it all through without the IRS giving you a call, you’d still pay tax on the money the Foundation pays you, so it would be a wash at the very best – and that’s unlikely.
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### Author:  [@What\_the](https://boards.straightdope.com/u/What_the)
#### Post date: [October 25, 2013, 6:58pm UTC](https://boards.straightdope.com/t/how-does-a-private-foundation-work/672220/3 "2013-10-25T18:58:05Z")
> [@RealityChuck](#):
>
> To be tax exempt, the money cannot go to anyone on the board of directors or to stockholders (profits can be kept and put into an organizational account, but not distributed except to cover legitimate expenses), the mission of the organization would have to fall withing tax-exempt guidelines, and the services of the foundation must be available to people who are nonmembers of the organization.
>
> You could set yourself up as executive director – with a salary and provision for businesses expenses – but there would have to be a board overseeing you. Any income you make would be taxed.
>
> If you took your income from other sources and gave it to the foundation, it would be tax deductible, but a portion of that money would have to go to program expenses. Even if you could figure out a way to pass it all through without the IRS giving you a call, you’d still pay tax on the money the Foundation pays you, so it would be a wash at the very best – and that’s unlikely.
That would even be worse than a wash due to employment taxes.
To “make money” one would have to generate contributions or grants from others.
…but another advantage would be for deductible travel and operating expenses that would otherwise be personal.
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### Author:  [@friedo](https://boards.straightdope.com/u/friedo)
#### Post date: [October 25, 2013, 7:02pm UTC](https://boards.straightdope.com/t/how-does-a-private-foundation-work/672220/4 "2013-10-25T19:02:13Z")
> [@What\_the](#):
>
> …but another advantage would be for deductible travel and operating expenses that would otherwise be personal.
You will need to convince your board (and potentially the IRS) that this travel has a legitimate business purpose for your organization.
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### Author:  [@Dewey\_Finn](https://boards.straightdope.com/u/Dewey_Finn)
#### Post date: [October 25, 2013, 7:10pm UTC](https://boards.straightdope.com/t/how-does-a-private-foundation-work/672220/5 "2013-10-25T19:10:10Z")
> [@What\_the](#):
>
> To “make money” one would have to generate contributions or grants from others.
Generally, though, private foundations don’t solicit donations from others. Instead, generally, a family or individual sets up and endows a private foundation with its own money.
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### Author:  [@dracoi](https://boards.straightdope.com/u/dracoi)
#### Post date: [October 25, 2013, 7:19pm UTC](https://boards.straightdope.com/t/how-does-a-private-foundation-work/672220/6 "2013-10-25T19:19:08Z")
Really, there are just two main advantages to private foundations as I see it:
1. the donor may get more control over how funds are used than if they donate to another organization.
2. the donor can make a very large donation in year 1 even though the foundation uses that money for charity over 10 years.
And the main difference between a private foundation and public charity is the funding source. A public charity has to receive a certain percentage of its funding from the public. A private foundation can get all of its money from one person and/or from investments without changing its status.
The idea of making yourself a director and paying your own expenses is something of a wash. For one, anything you pay yourself as income/benefits is subject to tax. For another, expenses paid for charitable volunteering (things like travel costs) are deductible as charitable contributions under the normal rules. So the charity can’t pay for any expenses that the individual couldn’t deduct themselves.
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### Author:  [@What\_the](https://boards.straightdope.com/u/What_the)
#### Post date: [October 26, 2013, 4:07pm UTC](https://boards.straightdope.com/t/how-does-a-private-foundation-work/672220/7 "2013-10-26T16:07:48Z")
> [@dracoi](#):
>
> Really, there are just two main advantages to private foundations as I see it:
>
> 1. the donor may get more control over how funds are used than if they donate to another organization.
> 2. the donor can make a very large donation in year 1 even though the foundation uses that money for charity over 10 years.
>
> And the main difference between a private foundation and public charity is the funding source. A public charity has to receive a certain percentage of its funding from the public. A private foundation can get all of its money from one person and/or from investments without changing its status.
>
> The idea of making yourself a director and paying your own expenses is something of a wash. For one, anything you pay yourself as income/benefits is subject to tax. For another, expenses paid for charitable volunteering (things like travel costs) are deductible as charitable contributions under the normal rules. So the charity can’t pay for any expenses that the individual couldn’t deduct themselves.
Thanks for the info on what a private foundation is… maybe that is not the term I was looking for.
As an example, say somebody was an expert on the civil rights movement and enjoyed traveling and speaking to school groups. He could cover all of those expenses himself as sort of a hobby. However, if that was the purpose of an organization that had a charitable status he could make a charitable contribution and those funds would be used to pay the expenses without being income to him. I would also think that there are people and organizations out there that would also be willing to contribute toward his project.
How about fees… does the IRS require anything to act on an application for a charity?
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### Author:  [@friedo](https://boards.straightdope.com/u/friedo)
#### Post date: [October 26, 2013, 4:18pm UTC](https://boards.straightdope.com/t/how-does-a-private-foundation-work/672220/8 "2013-10-26T16:18:56Z")
> [@What\_the](#):
>
> Thanks for the info on what a private foundation is… maybe that is not the term I was looking for.
>
> As an example, say somebody was an expert on the civil rights movement and enjoyed traveling and speaking to school groups. He could cover all of those expenses himself as sort of a hobby. However, if that was the purpose of an organization that had a charitable status he could make a charitable contribution and those funds would be used to pay the expenses without being income to him. I would also think that there are people and organizations out there that would also be willing to contribute toward his project.
The qualify as a public charity, an organization needs to meet certain criteria outlined in section 501(c)(3) of the Internal Revenue Code:
> [@26 USC § 501](#):
>
> (a) Exemption from taxation
> An organization described in subsection (c) or (d) orsection 401 (a) shall be exempt from taxation under this subtitle unless such exemption is denied under section 502 or 503…
>
> (c)(3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.
Going around speaking to school groups probably does not qualify, unless the bulk of the organization’s activities actually involve civil rights work.
There is also an $850 fee to apply for charitable status _if_ the organization expects to have more than $10,000 in gross receipts per year. I think it’s free if less than that.