According to IRS Publication 4221-PF
For tax purposes, it may be necessary to distinguish between the particular types of private foundations: private operating foundations, exempt operating foundations and grant-making (or non-operating) private foundations. Some tax law provisions apply to all types of private foundations, while other rules only apply to particular types of private foundations. The organization’s exemption letter will indicate whether the organization has been classified as a private foundation, a private operating foundation or an exempt operating foundation.
Private operating foundations and exempt operating foundations are relatively uncommon. A private operating foundation is a private foundation that devotes most of its resources to the active conduct of its exempt activities as distinguished from the more common grant-making foundation that generally makes grants to other organizations for exempt purposes. A museum that is supported by a limited number of individuals would generally be an example of an operating foundation.
A private foundation that makes grants to public charities or individuals in order to carry out its exempt purposes would generally be a private non-operating or grant-making foundation. However, grant-making private foundations may conduct their own programs as well. While most of the restrictions and requirements that apply to private foundations also apply to private operating foundations, there are tax advantages to being classified as a private operating foundation. For example, charitable contributions to a private operating foundation qualify for a higher charitable deduction limit on the donor’s tax return. In order to demonstrate that it is a private operating foundation, an organization must meet an assets test, a support test, or an endowment test and demonstrate that it distributes substantially all (85% or more) of the lesser of its adjusted net income or minimum investment return directly for the active conduct of activities that further its exempt purposes.
Certain private operating foundations, referred to as exempt operating foundations, are exempt from the excise tax on net investment income that applies to other operating and grant-making foundations. This type of operating foundation must have been publicly supported for at least 10 years and have a broadly representative board with limited participation by disqualified persons. This type of private operating foundation is extremely rare. A nonexempt charitable trust that has not obtained tax-exempt status under section 501(c)(3) is also treated as a private foundation where its unexpired interests are solely devoted to one or more charitable purposes and it has been allowed to receive tax-deductible, charitable contributions.
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