Filed under: Foundations

February 26, 2024

Have you ever heard of a conduit foundation? Probably not if you are like most foundation leaders. This little-known rule for private foundations can yield significant tax savings for individual donors if the proper steps are followed. Often, a private foundation already qualifies as a conduit foundation and it doesn’t even know it!

What is a conduit foundation? Simply put, a conduit foundation is a type of private foundation that redistributes its charitable contributions to other charities rather than keeping the donations to create an endowment. The biggest benefit of conduit foundation status is tax savings for the individual donor. Giving to a conduit foundation has the same charitable deduction tax treatment as giving to a public charity:

  • Cash donations are deductible up to 60% of an individual’s contribution base (normally the limit is 30%).
  • Donations of marketable securities are deductible up to 60% of an individual’s contribution base (normally the limit is 30%).
  • Donations of appreciated, long-term capital assets receive a fair market value deduction of up to 30% of an individual’s contribution base (normally the limit is 20% and limited to the donor’s basis). This may include closely held stock, real estate, and partnership interests, for example.

The conduit foundation election can be an easy way to create immediate tax savings for a private foundation donor during the year.

Examples of How Conduit Election Works

A donor’s adjusted gross income is $30M during the year and the donor makes a $12M gift.  In a simple scenario, the donor may deduct $9M this year (30% limit for private foundations), leaving an extra $3M that carries forward to next year.  If the donor has a loss on next year’s return, no deduction is allowed and the amount continues to carryforward.

However, if the foundation qualifies as a conduit foundation, the donor can now deduct the full $12M gift as the contribution limit may increase to 60%.

This creates immediate tax savings and allows the donor to potentially deduct the full donation rather than carrying forward an amount that may go unused.

How to Qualify as a Conduit Foundation

To qualify as a conduit foundation, the private foundation must:

  1. Satisfy its required private foundation payout amount for the year;
  2. Distribute an additional amount equal to the total contributions received during the year (either through additional cash disbursements or using its prior year excess distributions carryover);
  3. Make these distributions within 2.5 months after its year-end; and
  4. Include the proper election statement on its Form 990-PF.

In many cases, a private foundation with a sizeable distribution carryover can qualify as a conduit foundation with very little effort.

The election is made annually; just because a foundation makes the election one year does not mean it must do so in a future year. Given the complex nature of tax laws and regulations, foundations should consult with a tax advisor or legal expert to understand the implications of making the conduit foundation election.

For calendar year private foundations, the distribution requirements must be met by March 15, so act quickly to avoid missing out on this tax planning opportunity.

For other tax-saving strategies, insights on current philanthropy trends, and the opportunity to network with other grantmaking foundations, register for the Western Philanthropy Conference on May 20 and 21, 2024, in Renton, Washington. If you have questions regarding conduit foundation status, send us an email!

© Clark Nuber PS, 2024. All Rights Reserved.

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.