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Private Foundations

Every organization that qualifies for tax-exempt status under section 501(c)(3) of the Code is further classified as either a public charity or a private foundation. We come to you with an understanding of how private foundations operate, tax issues and reporting requirements. Our intent is to bring significant value to every client relationship.

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Prepare and File Taxes

Private foundations generally are required to file Form 990-PF, Return of Private Foundation, annually whether or not they have any taxable income for, or activity during, the year. The form is due on the 15th day of the fifth month following the close of the foundation's tax year. In order to complete the 990-PF, the foundation must keep detailed books and records throughout the year of its contributions, disbursements, expenses, sales of assets, capital gains and similar items.

If a foundation has over $1,000 in UBTI (Unrelated Business Taxable Income) in a year it must also file a Form 990-T. Section 4940 of the Code imposes an excise tax of 2% on the net investment income of most domestic tax-exempt private foundations, including private operating private foundations. This tax must be reported on Form 990-PF and paid annually at the time for filing that return or in quarterly estimated tax installments if the total tax for the year is more than $500. Some exceptions apply. Exempt operating foundations are not subject to the tax. Further, some foundations are only required to pay a 1% tax.

  • Federal Tax Return Forms for Private Foundations
    Form 990-PF
    Form 990-T

  • California State Tax Return Form for Private Foundations
    Form 199
    CA Form RRF-1

Application for Exempt Status

In order to obtain tax-exempt status, a private foundation must file with the Internal Revenue Service a Form 1023, Application for Recognition of Exemption. The application must be filed within fifteen (15) months of the date of incorporation of the foundation. The foundation will be granted tax-exempt status if it demonstrates that it has recognized charitable purposes (e.g. contributing to charitable organizations), does not provide financial or other benefits to its creators or other private persons, is governed by appropriately drafted articles of incorporation and code of regulations or by-laws and is not permitted to engage in non- charitable, political and/or lobbying activities. The Internal Revenue Service charges a fee for processing the application for recognition of exemption.

Restrictions on Private Foundation

  • Restrictions on self-dealing between private foundations and their substantial contributors and other disqualified persons

  • Requirements that the foundation annually distribute income for charitable purposes

  • Limits on their holdings in private businesses

  • Provisions that investments must not jeopardize the carrying out of exempt purposes

  • Provisions to assure that expenditures further exempt purposes

Tips for Private Foundations

  • Keep a real-time list of disqualified persons (such as substantial contributors, foundation managers, owner of more than 20% voting power etc.)

  • Professional managers and paid trustees should take reasonable compensation

  • Be aware of self-dealing acts and taxable expenditures

  • Ensure you qualify for 1% tax on net investment income

  • Maintain proper records to meet IRS reporting requirements

Advantages and Disadvantages of Private Foundation

The principal advantage of a private foundation is that it provides a vehicle for the person(s) establishing the foundation to make a tax deductible charitable contribution and retain significant control over the foundations charitable giving program. Other advantages of a private foundation include the opportunity to involve family members in philanthropic projects and flexibility in charitable giving.

The principal disadvantage of a private foundation is that such organizations are subject to the strict and complex private foundation excise tax provisions of the Internal Revenue Code. These excise taxes are meant to prevent certain types of conduct believed to lead to abuse in the private foundation area.

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