What is philanthropy?

According to Webster’s Dictionary, the definition of philanthropy is the effort or inclination to increase the well-being of humankind, as by charitable aid or donations; and the love of humankind.

What is a foundation?
Grantmaking foundations are nonprofit, charitable, tax-exempt organizations that provide grants to support a wide variety of charitable causes and concerns. They are created by gifts of money, stock or other resources from individuals, families and corporations that wish to dedicate some of their private resources toward serving the public good. These gifts or assets are typically invested and the income generated is used to make grants.

Not every organization that uses the word "foundation" in its name is a private foundation, and the word "foundation" has no legal meaning in and of itself. Rather it is important to look at the activities of the organization and the IRS designation. Click here to read about the various types of giving.

How many foundations are there?
The total number of U.S. foundations had reached 56,582 in 2000. Since 1987 the total number of foundations has doubled. In 1999 foundations contributed $27.56 billion in grants to nonprofit organizations. This support represents a 18.1% increase over 1999 giving.

California is home to more than 4,948 foundations, and California foundations contribute over $3.4 billion annually in grants.

For more statistics check out SDGrantmakers’ “Giving Trends” or visit www.fdncenter.org/fc_stats/index.html.

How are foundations regulated?
The IRS and the state Attorney General enforce the Internal Revenue Codes governing the operations of both private and public charities. The rules governing private foundations are more strict in limiting foundation activities than are those for the public charities. For example, private foundations:

• are required to pay out for charitable purposes each year an amount equal to 5% of the fair market value of their assets;
• pay an excise tax of 1% to 2% on their investment earnings;
• are prohibited for lobbying or political activity;
• are subject to very strict self-dealing or conflict of interest rules which make sure that there is no inappropriate private gain from the foundations activities;
• file an annual information return with the IRS listing: all of the grants made during the year: their investment holdings: the names of those serving on their Board of Directors; their application guidelines and procedures; as well as other information. These returns are public documents and are available for public use at the Foundation Center libraries.

What is a payout?
The “payout” is the percentage of assets a foundation distributes to qualifying charitable organizations in a year. The IRS requires most foundations to pay out 5% of the fair market value of their assets for charitable purposes each year.

While the 5% payout requirement establishes a basic floor for qualifying charitable distributions, many foundations in fact exceed this requirement. California foundations, for example, exceeded the minimum payout requirement in 1995 (the last year for which complete data was available from the Foundation Center) by more than $300 million. Even excluding administrative costs and direct charitable activities, California foundations exceeded the payout by $85 million in grants alone.

What is an operating foundation?
Approximately 2% of all foundations in the U.S. qualify as operating foundations. An operating foundation is an organization whose primary purpose is to run their own direct charitable programs, they may also give grants. Because an operating foundation takes on many programmatic and administrative tasks the IRS requires their minimum payout distribution to equal a minimum of 3.5% of the fair market value of their assets.

The Getty Center in Los Angeles is an excellent example of an operating foundation. The J. Paul Getty Trust – an operating foundation -- has built and maintains an incredible museum showpiece open to the public for free. In addition, they engage in various arts education programs and give grants.

How can I start my own foundation?
There are a number of options to choose from if you would like to create your own philanthropy, such as setting up a private foundation or establishing a fund within a community foundation. These options provide for different ways to meet your charitable goals and have differing tax consequences.

What is the difference between foundations and charities?
The Council on Foundations defines a private foundation as a nongovernmental, nonprofit organization having a principal fund managed by its own trustees or directors. Private foundations maintain or aid charitable, educational, religious, or other activities serving the public good, primarily through the making of grants to other nonprofit organizations.

Another difference between private foundations and public charities is that private foundations usually derive funds from a single source, such as an individual, family, or corporation. A private foundation does not solicit funds from the public. On the other hand, public charities generally fundraise through numerous sources to support programs. Some charities engage in grantmaking activities, however their primary business is serving the public good through direct service.

What is a 501(c)(3)?
The Internal Revenue Code labels nonprofit, charitable, tax-exempt organizations as 501(c)(3)s. Almost all foundation giving must be granted to organizations that have 501(c)(3) status – with few exceptions.

How can I check an organization’s 501(c)(3)?
First of all, all organizations with 501(c)(3) status must keep copies of their legal paperwork on file. If you are considering giving them a grant, ask them for their 501(c)(3) number and request a copy of its most recent annual report and IRS Form 990.Charities should provide this information in a timely manner and these materials should give a general idea of how the organization spends the money it raises. In addition you may check for public documents a several web resources including at www.guidestar.org.

How can I find out if an organization is tax-exempt?
Go to the IRS' website on tax-exempt charities. From there, you can choose the "search" option. Then, just type in the name and location of the organization you're interested in. If that organization has been recognized by the IRS as eligible to receive tax-deductible contributions, it should be found in Publication 78, which the computer scans when you command it to perform a search.