Most of the non-profit organizations in U.S.A operate as :
- Public Charitable Organizations
- Private Foundations
The rules & regulations for both these categories differ widely.
1) Public charitable organization: An organization that raises funds from the general public or from a variety of funding sources is a public charity.
A public charitable organization generally runs active or continuing programs to raise funds from a number of sources which could include the general public, private organizations, funding agencies and/or Government agencies.
Public charities enjoy more benefits than private foundations (discussed below).
For instance, private foundations are subject to excise taxes while public charities are not required to do so.
Further Income exemption deductions for contributions to a private foundation is lesser than deductions allowed for contributions made to a public charity.
To claim the benefits of a public charitable organization, IRS requires organizations to prove their public charity status with the public support test.
Public charitable organizations further classify themselves as religious, charitable, educational, scientific or literary organizations for the purpose of tax exemptions under 501(c)(3) of the IRS code
Organizations for testing for public safety, or to foster National or International amateur sports competition, or to prevent cruelty to children or animals are also included under this section.
2) Private foundations: An organization that solicits funds and donations from a limited number of members who contribute a major portion of donations to the organization are called private foundations.
Private foundations normally do not actively or directly engage in actual charitable work. Instead, they fund the organizations that work on the chosen causes.
Private foundations are treated less favorably by the IRS at the time of granting 501(c)(3) tax exemption.
Unlike public charity, a private foundation is required to pay tax on its capital gains. Private foundations are subject to a wide variety of restrictions on investing their assets and conduct their operations.
The percentage limits placed on the deductible donation are also lower.
The most commonly found non-profit organizations
A large number of non-profit organizations operating in the U.S.A can be classified as public charitable organizations as per the IRS data book
Donor agencies and funding individuals often choose the private foundation structure.
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