Donor advised funds versus private foundations

Contribution timing and records

Deduction timing follows payment of the charitable contribution, subject to the applicable deduction and substantiation requirements.

A donor advised fund contribution also requires a contemporaneous written acknowledgment from the sponsor stating that the sponsor has exclusive legal control over the contributed assets. That acknowledgment does not independently establish deductibility.

The sponsor cannot be an organization described in §170(c)(3), (4), or (5), or a nonfunctionally integrated type III supporting organization.

For any single contribution of $250 or more, a deduction requires a contemporaneous written acknowledgment from the charity meeting the content requirements of §170(f)(8)(B).

Property deductions over $5,000 generally require a qualified appraisal and the information the IRS requires on the return. For property deductions over $500,000, the appraisal itself generally must accompany the return.

These appraisal requirements have exceptions for cash, certain inventory, publicly traded securities, and certain vehicles. Failure can be excused when due to reasonable cause and not willful neglect.

Deduction limits depend on the gift and recipient

For individuals, contribution base means adjusted gross income computed without any net operating loss carryback. The applicable percentage ceiling depends on both the donated property and the recipient classification.

• Gifts to public charities and other §170(b)(1)(A) organizations generally have a 50% ceiling. Cash gifts to those organizations have a 60% ceiling.
• Capital gain property gifts to those organizations have a 30% ceiling when §170(e)(1)(B) does not apply.
• Other gifts generally face the lesser of 30% of contribution base or the remaining 50% capacity after gifts covered by §170(b)(1)(A).
• Capital gain property gifts outside §170(b)(1)(A) face the lesser of 20% of contribution base or remaining 30% capacity after contributions covered by §170(b)(1)(C). These gifts are taken into account after other charitable contributions.

Excess contributions under these percentage ceilings carry forward for five succeeding taxable years, in order, retaining their applicable category. An individual's otherwise allowable charitable deductions count only to the extent aggregate contributions exceed 0.5% of contribution base.

For property contributions to private foundations outside §170(b)(1)(F), the deduction generally is reduced by the unrealized long term capital gain, measured using fair market value at contribution.

Qualified appreciated stock avoids that particular reduction only within a cumulative limit of 10% of the corporation's outstanding stock value. The stock must be capital gain property with market quotations readily available on an established securities market at contribution.

The limit aggregates the donor's prior such contributions and family contributions under §267(c)(4). Other deduction rules still apply.

Foundation transactions and investment income

Private foundation self dealing includes direct or indirect sales, exchanges, leases, loans, goods, services, facilities, and compensation transactions involving a disqualified person. It also includes transfers or use of foundation income or assets for that person's benefit.

Statutory exceptions apply. Compensation or expense payments for a disqualified person's reasonable and necessary personal services serving the foundation's exempt purpose are excepted if not excessive. This exception excludes government officials as defined in the self dealing statute.

A private foundation exempt under §501(a) generally owes tax equal to 1.39% of net investment income. An exempt operating foundation qualifies for an exception only when all the statutory conditions are met.

Those conditions require operating foundation status and at least ten taxable years of public support. Throughout the taxable year, its governing body must be broadly representative of the public and consist of at least 75% nondisqualified individuals.

No officer may be a disqualified individual at any time during the taxable year. Disqualification for this exception follows the investment income tax statute's specific definition.

Two related terms

Donor advised fund. A fund separately identified by donor contributions, owned and controlled by its sponsor, with donor advisory privileges or a reasonable expectation of them over distributions or investments. The statutory definition excludes single organization funds and certain grant funds.

Qualified appraisal. An appraisal conducted by a qualified appraiser under generally accepted appraisal standards and meeting applicable IRS requirements.

An investor's giving perspective

A participant described a personal commitment to youth and community programs. Consider which causes you want your own giving to serve.

"just launched a donor advice fund and been doing a lot to donate to kids so that one hour world record that I did actually raised hundreds of thousands of dollars to give back to kids and youth sport and Community programs across North America which we did"

Common questions