The term “corporate foundation” doesn’t actually have any official definition in US tax code. Usually, however, it is used to refer to either a private foundation controlled by a corporation, or a public charity associated with a corporation. These two forms each have similar features, with a few critical differences. A good primer on the differences between a private foundation and a public charity can be found on the IRS website. From the perspective of a firm considering a corporate foundation, however, there are two considerations relating to the source of the funds and the degree of control that the firm wants to exercise over those funds.
Most corporate foundations are of the private foundation type. This is because they are created by a single corporation, funded by that corporation’s money, and controlled by that corporation's employees or directors. The IRS puts restrictions on private foundations because of that concentration of creation, funding, and control. For example, private foundations cannot make gifts anonymously, must spend at least 5% of their assets each year, must pay an annual excise tax on investment income, and need to complete the complex and time-consuming 990-PF tax return each year. On top of that, directors and managers of the foundation can be fined if they don’t properly follow the rules.
A smaller number of corporate foundations are of the public charity type. In order for a corporate foundation to be classified as a public charity, at least one-third of the total contributions must come from several sources, none of which made a donation worth more than 2% of the total. For example, if a foundation receives $1000 in donations, at minimum $333 (1/3) of that must be spread over donors who gave no more than $20 (2%) each — which would be at least 17 small donors. By meeting this “public support test,” corporate foundations that qualify for this classification enjoy some extra benefits. Donors or donations can remain anonymous, some donations with capital gains are deductible at a higher amount, investment revenue is not taxable (within some reasonable limits), and the annual tax return is a little less complicated.
Because corporate foundations don’t usually raise money from the general public, the public charity classification seems to be a poor fit. Some corporate foundations are able to meet the public support test by encouraging employees to make contributions to the fund. Employees are able to take a tax deduction for the contribution, and generally designate where they want their donations to go. When employers then match their employees’ contributions to the foundation it helps to both encourage donations and meet the public support test.
Saving the best for last, there is a third option, which allows a corporate foundation to enjoy the benefits of public charity classification without needing to meet the public support test. Similar in structure to a donor advised fund, the Instant Corporate Foundation™ is classified as a public charity. Rather than being created one-to-one with a corporation, the Instant Corporate Foundation™ can be thought of as a corporate foundation co-op, sharing donors (and expenses) with every other participating corporation. That means that the public support test is never a problem, even if each firm only makes corporate contributions.
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FURTHER READING
Why would you want a corporate foundation?
How to set up a corporate foundation
Alternatives to a corporate foundation
What are the business benefits of CSR?
What are corporate philanthropy best practices? (coming soon)
How do you make a corporate philanthropy budget? (coming soon)
How do I manage charity requests?
Why might you avoid a corporate foundation?
