Income Test for Private Operating Foundation

In order to qualify as a private operating foundation, a nonprofit organization should prove that majority of its resources are used to run its own charitable programs or to provide its own charitable services.

IRS has mandated ‘Income Test’ as a method of distinguishing between a private operating foundation and a public charity. Income test is the most important criteria for being recognized as a private operating foundation.

Income test: An organization is said to meet the requirements of Income test, if its direct operating expenses counts for at least 85 percent of the adjusted net income.

In addition to the income test, IRS also requires a private operating foundation to qualify in at least one of the following tests:.

Asset Test – A private operating foundation would qualify in this test, if 65 percent or more of the foundation’s assets are devoted to conduct its exempt activity, and these assets consist of corporate stock that is controlled by the foundation.

Endowment Test – A private operating foundation qualifies under the endowment test, if at least two-thirds of the foundation’s minimum investment return is distributed directly in connection with actively conducting its exempt activity.

Support Test – This test has three parts and all the three parts must be satisfied to qualify as a private operating foundation.

• The foundations should receive at least 85 percent of its total funds (gross contribution) from the general public or from five or more unrelated exempt organizations.

• The foundation should not receive more than 25 percent of its gross contribution from any single exempt organization.

• More than 50 percent of the foundation’s support should not be generated through investment income.