Private Foundation Tax Return: How to File

A private foundation is a charitable organization that derives its financial support from a single source, such as an individual, family, or corporation. These entities must file an annual tax return with the IRS called Form 990-PF, Return of Private Foundation. The form serves a dual role: it is used to calculate tax liabilities, like the excise tax on investment income, and it acts as a public disclosure document, offering transparency into the foundation’s finances and charitable activities.

Information and Documentation for Form 990-PF

Preparing Form 990-PF requires gathering a comprehensive set of documents and data. Having this information ready ensures accuracy and simplifies the filing process. Key documentation includes:

• Basic identifying data, including the foundation’s legal name, address, Employer Identification Number (EIN), and a list of all current officers, directors, and trustees.
• Detailed financial statements for the tax year, including a balance sheet showing assets, liabilities, and net assets, and an income statement detailing all revenue and expenses.
• A breakdown of all revenue sources, such as contributions, gifts, grants received, interest, dividends, and gross rents.
• Records for every sale of an investment asset, including the purchase date, original cost, and gross sales price, which are used to calculate capital gains or losses.
• A categorization of all expenses, allocated between operating/administrative costs and amounts paid for charitable purposes, like grants and direct program costs.
• A detailed list of all grants and contributions made, including each recipient’s name, address, tax-exempt status, the grant amount, and a description of its purpose.

Calculating Key Tax and Distribution Amounts

With all financial data gathered, the next step involves several specific calculations that determine the foundation’s tax liability and its mandatory charitable spending for the year.

Excise Tax on Net Investment Income

The primary tax for private foundations is a 1.39% excise tax on their net investment income, which includes interest, dividends, rents, and net capital gains. Foundation managers should monitor proposed legislation that could change this to a tiered system based on asset value, with rates potentially rising for foundations with larger asset holdings.

To calculate the tax, total the gross investment income and subtract any ordinary and necessary expenses paid to produce it, such as investment advisory fees. For example, if a foundation earns $100,000 in investment income and pays $5,000 in management fees, its net investment income is $95,000, and the tax would be $1,320.50.

Capital losses can only be used to offset capital gains within the same tax year. A net capital loss cannot be used to reduce other investment income and cannot be carried forward to future years.

Minimum Distribution Requirement (MDR)

Private foundations must meet a Minimum Distribution Requirement (MDR) to ensure they use their resources for charitable purposes. Failure to meet the MDR can result in a penalty tax of 30% on the undistributed amount.

The calculation begins with the average monthly fair market value of the foundation’s non-charitable assets, mainly its investment portfolio. A cash reserve of 1.5% of this value can be deducted. The result is multiplied by 5% to determine the “minimum investment return” (MIR).

The MIR is then adjusted by adding back any returned grant funds and subtracting the excise tax on net investment income. This final figure is the “distributable amount,” which the foundation must pay out by the end of the following tax year.

Qualifying Distributions

To meet the MDR, a foundation must make “qualifying distributions.” These are specific expenditures tracked on a cash basis that count toward the requirement. The most common qualifying distribution is a grant made to a public charity. Other expenditures that count include:

• Reasonable and necessary administrative expenses for charitable activities, such as a portion of salaries or rent.
• The costs of conducting direct charitable activities, like operating a scholarship program.
• Amounts paid to acquire assets used directly for charitable purposes.
• Program-related investments (PRIs), which are made to achieve a charitable purpose instead of a financial one.

Navigating the Sections of Form 990-PF

After gathering information and completing calculations, the data is entered onto Form 990-PF. The form is divided into sixteen parts, and understanding the function of the main sections connects the preparatory work to the final return.

Part I Analysis of Revenue and Expenses

Part I is the foundation’s detailed income statement, breaking down all revenue and expenses for the tax year. Its columnar format separates financial activity into categories. Column (a) shows totals from the foundation’s books, while other columns allocate these figures. Column (b) reports net investment income and related expenses, and Column (d) reports disbursements for charitable purposes on a cash basis, including grants and administrative costs.

Part IV & VI Capital Gains and Excise Tax

Data on investment sales and tax liability are reported in two parts. Part IV, “Capital Gains and Losses for Tax on Investment Income,” lists the details for each asset sale to calculate the net capital gain or loss for the year. This net gain figure is then used in Part VI, “Excise Tax Based on Investment Income,” where it is multiplied by the 1.39% tax rate to determine the final excise tax owed.

Parts X through XIII Distribution Requirement

Several parts of the form are dedicated to calculating and tracking the Minimum Distribution Requirement (MDR). Part X calculates the 5% “Minimum Investment Return” on non-charitable assets. The result flows to Part XI, “Distributable Amount,” where adjustments create the final MDR for the year. Part XII lists all qualifying distributions made, and Part XIII tracks undistributed income from prior years to show how current distributions are applied.

Part XV Supplementary Information

Part XV, “Supplementary Information,” serves a public disclosure function for foundations with assets over $5,000. This section is where the detailed list of grants and contributions, mentioned in the documentation section, is reported. It provides a transparent record of the foundation’s grantmaking activities, showing which organizations received funding and for what purpose. This part of the return is one of the most scrutinized sections by the public.

Filing Procedures and Public Disclosure Obligations

After completing Form 990-PF, the final steps are submitting the return and meeting transparency requirements. Following these procedures is necessary to avoid penalties.

Filing Deadlines

The filing deadline for Form 990-PF is the 15th day of the 5th month after the foundation’s fiscal year ends. For foundations on a calendar year, the due date is May 15.

Filing an Extension

A foundation can get an automatic six-month extension by filing Form 8868 before the original due date. This extension does not apply to the payment of any tax owed. The estimated excise tax must be paid by the original deadline to avoid interest and penalties.

Method of Submission

The IRS requires nearly all private foundations to file Form 990-PF electronically, a mandate from the Taxpayer First Act. Foundations must use an IRS-approved e-file provider to submit their return. This involves using the provider’s software to transmit the completed form to the IRS.

State Filing Requirements

Private foundations also have state-level filing obligations. A copy of Form 990-PF must be sent to the attorney general of the state where the foundation’s principal office is located. Copies may also be required in the state of incorporation or any other state that requests it. Foundations must verify the specific requirements for each state.

Public Disclosure Rules

Federal law requires foundations to make their three most recent annual returns available for public inspection at their principal office during business hours. Upon request, copies must be provided, and a reasonable fee can be charged for copying and postage. The IRS also makes these returns publicly available on its website and through third-party sites like Candid.