What is a community foundation?

A community foundation is a public charity that typically focuses on supporting a geographical area, primarily by facilitating and pooling donations used to address community needs and support local nonprofits. Community foundations offer numerous types of grantmaking programs, frequently including donor-advised funds, endowments, scholarships, field-of-interest funds, giving circles and more. Community foundations are funded by donations from individuals, families, businesses and sometimes government grants.

A banker, Frederic Goff, established the first community foundation in Cleveland, Ohio, in 1914. His goal was to create a permanent endowment that would benefit the citizens of greater Cleveland for years to come. More than a century later, The Cleveland Foundation awards grants worth nearly $80 million each year to a variety of projects and programs in that region.

Today, there are about 700 community foundations operating in the United States, focused on addressing community needs in a select city, county, state or region.

Types of programs offered by community foundations

Community foundations offer a variety of programs designed to support the needs of the communities they serve, whether local or more broadly defined. Common areas of support include education and human services programs, such as literacy or aid for the homeless.

A community foundation’s grantmaking programs are supported both by donations designated for immediate distribution and income from the foundation’s endowed funds. An endowed fund or endowment is a permanent source of funds that is invested for long-term growth. Each year, some of the funds (typically around 5 percent) are disbursed to fulfill the fund’s purpose; as the invested balance grows, more is available for distribution over time. Typically, such funds include:

• Designated funds—Used to support one or more specific designated charities in the supported region.
• Field of interest funds—Used for particular issues, such as the environment or health care.
• Scholarship funds—Used to support the education of students who meet certain criteria.
• Unrestricted funds—Used to meet a community’s unexpected needs such as opioid addiction or natural disaster relief.

Depending on the community foundation and rules governing the specific funds, professional staff, a board of directors, and/or a group of volunteers may be involved in choosing how the funds are distributed to charities or other recipients. The board is ultimately responsible for ensuring that the funds are managed and dispersed in accordance with all laws and policies.

What’s the difference between a community foundation and a private foundation?

Like community foundations, private foundations are nonprofit organizations that can also be established with a mission to serve the community and provide grants to local charities. However, the two types of organizations are categorized differently by the IRS and have different requirements on how they are governed.

• A community foundation is classified by the IRS as a public charity, a categorization that means it derives the majority of its support from the public. Public charities also must be governed by a diverse board of directors.
• A private foundation is usually established by a single individual, family or corporation and is typically funded exclusively by the founders or a small group of associates. Although some private foundations have governance structures independent from the founders, the majority are closely managed and governed by the founders and their families or close associates.

Charitable tax deductions for donors

Donors to community foundations may be eligible to take a tax deduction for their support, up to IRS limits.

Donations of cash or cash equivalents to public charities like community foundations are deductible up to 60 percent of the donor’s adjusted gross income (AGI).

For direct donations of appreciated assets, including publicly traded stock, closely held stock, real estate and other long-term capital-gains property, donors are eligible to deduct the fair-market value of donated asset deductible up to 30 percent of AGI. In addition, the donor does not need to pay capital gains tax on the appreciation, a potential tax savings of up to 20 percent.

Tax treatment of donations to public charities is generally more favorable than tax treatment of donations to private foundations.

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Community foundations and donor-advised funds

Many community foundations also offer donor-advised funds, one of the easiest and most popular ways today for donors to make a charitable impact and receive significant tax advantages. A donor-advised fund is like a dedicated account for charitable giving—sponsored by a public charity—that enables donors to contribute to the fund, be eligible for an immediate tax deduction and recommend grants to any IRS-qualified charity.

Similar to endowed funds, the balance in the account can also be invested for tax-free growth, creating additional funds available to support charities. As the name implies, with a donor-advised fund, the donor establishing the fund advises on how and where the funds are distributed or invested rather than the community foundation staff or board.

There is a broad array of charities that sponsor donor-advised fund programs, including Fidelity Charitable. A donor-advised fund can be used to support the work of your favorite community foundation, regardless of where it is established. Many donors at Fidelity Charitable, for example, choose to recommend grants to their local community foundations to support local needs.

However, when selecting a donor-advised fund to meet your charitable giving needs and goals, it’s important to understand that not all of these programs are alike. Programs differ in terms of minimums to open, fees, support available to the donor for their grantmaking, assets that can be contributed, minimums for contributions and grants, investment options, and other requirements. If you are considering establishing a donor-advised fund, it is generally wise to compare options to select a program that best matches your needs.

Learn more about the Giving Account. Or take this five-question quiz to find out whether a donor-advised fund is right for you.