Funding
Frequently Asked Questions about Funding
Tax exemption under IRS code §501(c)(3) has two primary benefits: 1) the donor making a donation to the nonprofit gets a tax deduction, and 2) there is no income tax on related earned income. This is true for purposes of federal income tax and Iowa income tax. Other benefits include the ability to issue tax-exempt bonds for capital projects, qualification for tax-exempt retirement plans (403(b)), and special postal rates.
A community foundation is a tax-exempt public charity that can assist a community in maintaining and improving the quality of life enjoyed by its citizens. Contributions from individuals, corporations, government sources, and other organizations are used to create a collection of permanently endowed funds within the foundation. Community foundations distribute income from the endowments throughout the community by making grants to various organizations and projects that will benefit the community and reflect the wishes of the donors. Though the word "foundation" is in the community foundation name, its tax treatment is not that of a private foundation but of a public charity. The Iowa Council of Foundations has information on what community foundations are doing in Iowa.
A cause-branding program is a program for corporate charitable giving by which a company commits itself to a specific charitable cause. For instance, the cosmetic company Avon has committed itself to raising breast cancer awareness, and ConAgra Foods has committed itself to fighting child hunger in the United States. Companies involved in cause programs contribute more than just money. They contribute experience, business sense, and talent. Through such associations, businesses improve their reputations, strengthen employee loyalty, build business networks, and even increase sales. Charitable organizations realize an increase in donations, enjoy increased support both inside and outside of the businesses with which they are associated, and benefit from the resources corporate sponsors can offer. An example is ConAgra Foods' commitment to alleviating child hunger.
Every US and foreign charity that qualifies under Internal Revenue Service Code section 501(c)(3) as tax-exempt is a private foundation unless it demonstrates to the IRS that it falls into the public charity category. According to The Foundation Center, a private foundation is a nongovernmental, nonprofit organization having a principal fund managed by its own trustees or director. Generally, a private foundation is a fund of private wealth established for charitable purposes. The principle function of most private foundations is to make grants to other nonprofit organizations, qualified individuals, and government entities. On the Form 1023 application for exemption Part X, you work through factors to determine if the nonprofit can get public charity status. Generally, tax treatment for a private foundation is less favorable than for a public charity.
There are a number of ways that a 501(c)(3) moves from private foundation to public charity status. If the nonprofit is a church, school, or hospital, or tests for public safety, it will be a public charity. The nonprofit can also get its funding or support primarily from the general public, receiving grants from individuals, government, and private foundations. If one third of the organization's support comes from these public sources, it passes the "public support test". There are a variety of such support tests. For more information about them, see page 32, Qualifying as Publicly Supported in IRS Publication 557 - Tax Exempt Status for Your Organization. On the Form 1023 application for exemption Part X, you work through factors to determine if the nonprofit can get public charity status. After receiving exemption, Form 990 filers will then use Schedule A to calculate that fiscal year's public support.
A donor may only take a contribution deduction to the extent that the donor's contribution exceeds the fair market value of the goods or services the donor receives in return for the contribution. This means that recipient organizations must provide written disclosure statements to donors who make a payment exceeding $75 when that payment is partly for contribution and partly for goods and services provided by the recipient organization. This type of contribution by a donor in exchange for goods or services is known as a quid pro quo contribution.