Country / Language

How to Qualify as a Private Operating Foundation


The following article was included in CohnReznick's The Not-for-Profit Advisor - Winter 2014 issue.

Private operating foundations (POFs) offer several advantages over standard private foundations. For example, POFs are exempt from mandatory distributions (other non-operating foundations must distribute at least 5% of the value of their net investment assets for exempt purposes, regardless of investment performance). Also, donors to POFs enjoy tax benefits similar to donors to public charities. These include a higher deduction limit for contributions of cash and ordinary income property from individuals (generally 50% of the individual’s contribution base as opposed to 30% for private non-operating foundations) and the ability to deduct the full value of certain gifts of appreciated property.

To maintain “operating” status, a foundation must meet certain financial tests designed to ensure that it devotes most of its resources to the active conduct of exempt activities – such as operating a museum, library, or nursing home – as distinguished from a purely grant-making foundation.

Income test. A POF must spend at least 85% of its income on the active conduct of exempt activities. Income means its adjusted net income or its minimum investment return (5% of net investment assets), whichever is smaller.

Alternative tests. A POF also must meet at least one of these tests:

  • Asset test – The foundation devotes at least 65% of its assets to active conduct of exempt activities and/or to a functionally related business.
  • Support test – The foundation derives at least 85% of it support (other than gross investment income) from the general public and at least five independent exempt organizations, with no more than 25 percent of its support from any one exempt organization and no more than half of its support from gross investment income.
  • Endowment test – The foundation spends at least two-thirds of its minimum investment return on the active conduct of exempt activities.  (Foundations that meet the income test usually meet this test).

To qualify, a POF must meet these tests either: 1) for any three years of a four-year period (consisting of the year in question and the immediately preceding three years), or 2) in the aggregate over a four-year period. The second approach is helpful if a foundation makes large expenditures in some years but not in others.

POFs should track and document their income, assets, and expenditures carefully to ensure they stay in compliance.

What Does CohnReznick Think?
For organizations that have limited funding sources, but want to further an exempt purpose other than paying out grants to other charities,POFs offer a great alternative to public charity status. Foundation managers need to understand how each of the above tests work in order to make sure the organization qualifies each year. 


For more information, please contact Thomas Lanning, Partner, at 646-834-4108, or Magdalena Czerniawski, Manager, at 646-254-7419. To learn more about CohnReznick’s Not-for-Profit Industry Practice, please visit our webpage.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Search Our People

Search Our People

Look ahead. Gain insight. Imagine more. Is your business ready to break through?

View our new TV commercial..

Industry Outlooks

Industry Outlooks

Gain insight into what is ahead for the Commercial Real Estate, Technology and Middle Market Private Equity industries.


Learn about our upcoming events.


Working With Us

Working With Us

What makes CohnReznick different from others in our profession? And what should our clients come to expect when working with us? The answer is The CohnReznick Advantage. Contact us to learn how we can out the CohnReznick Advantage to work for your business.


The value of an organization is determined by the skills and qualities of its leaders. With more than 280 partners serving clients nationwide, CohnReznick is renowned for the diverse experiences, knowledge and backgrounds of its leadership.

Learn More


We align our services in three segments: Accounting and Assurance, Tax, and Advisory. This approach allows us to provide holistic solutions to complex business problems and to seize upon opportunities requiring an integrated approach.

Learn More


Accounting and tax issues different significantly based on an organization's industry. We provide clients with expertise in nearly two dozen industries – we know the opportunities, the obstacles, the competitive landscape.

Learn more


CohnReznick professionals are thought leaders in their industries. Clients benefit from relevant and timely economic, legislative and industry insights that can keep them a step ahead of competition.

Learn More

Global Reach

Our involvement in the Nexia International network of firms enables us assist our clients wherever they do business-providing local expertise and connections wherever they needed. Nexia is comprised of 20,000 professionals operating in over 100 countries.

Learn More