The Basics of a Michigan Private Foundation (Part 3) -- Pass-Through Private Foundations
Generally speaking, contributions to public charities receive better tax treatment than contributions to private foundations. Federal tax law draws a distinction between the two because Congress considered private foundations in need of more regulatory oversight, and also considered donors to private foundations to be deserving of a somewhat less attractive deduction for their contributions.
The reason for this is that, in general, public charities receive funds from a broad group of donors and have boards that are responsive to such donors, while private foundations are often funded and controlled by one person or family. For example, the United Way and American Cancer Society are public charities because they receive substantial support from the general public. The Ford Foundation is a private foundation because it receives its funding from a single family.
However, it is possible to bridge the gap between these two type of charitable organizations and use a private foundation to reap almost all of the tax advantages that would normally be associated only with public charities. This is accomplished by using what is called a "pass-through private foundation."
Those who want to enjoy the benefits of a private foundation and also want to take advantage of the more favorable deduction limits of a public charity can annually elect pass-through status. A pass-through foundation must distribute its tax deductible contributions no later than the 15th day of the 3rd month after the close of the foundation's taxable year in which contributions are received by the foundation.
In my next post on this subject, I'll give a general overview of the mechanics of setting up a private foundation.
