By Akilah Massey, Exponent Philanthropy

Tax season will be here before we know it, and regulators estimate that at least 25% of all IRS Form 990-PFs have errors. Is your private foundation’s annual tax return among them?

Below are tips for private foundations from our primer Filing the Form 990-PF. 

Part I

• Column c—Most foundations should leave this column blank. Only private operating foundations and foundations with income from charitable activities use this column. 

• Line 2—If the foundation is not required to attach Schedule B, be sure to check the box. 

• Line 15—Reflect the foundation’s share of payroll taxes (e.g., Social Security, Medicare) here. Allocate any portion paid for the production of income to column b, and include only the charitable portion in column d. 

• Line 18—Include the excise taxes paid on net investment income only in column a, not in columns b or d.

Part IV

• Column b—Be sure to indicate whether each security sold was purchased or donated. 

• Line 2—Make the best use of capital losses by using them to offset gains and decrease the excise tax on net investment income. Since losses cannot be carried backward or forward to other years, consider whether to strategically sell appreciated assets in the same year you will have losses.

Part V

• Line 6—If your foundation holds publicly traded appreciated stock with a low cost basis, consider donating it to grantees, because you will forgo paying excise tax on the investment gain when you do. 

• Line 8—If the foundation’s qualifying distributions meet certain requirements, its excise tax will be reduced from 2% to 1%. For this reduction, the foundation must show that its qualifying distributions paid out before the end of the tax year equaled or exceeded the sum of the current year’s net investment assets multiplied by the average percentage of assets distributed by the foundation for the previous 5 years plus 1% of net investment income.

Part VII-A

• Line 2—If the foundation made significant changes to its activities that have not been reported to the IRS, such as greatly increasing its use of program related investments or direct charitable activities, check the box and explain the activities. 

• Line 3—The foundation must report to the IRS any change to the foundation’s governing documents, such as articles of incorporation or bylaws. If the foundation already sent a copy of the amended document to the IRS, do not check the box or attach the document. If the foundation has not yet reported the changes, check the box and attach the document with a written declaration signed by a foundation officer certifying that the copy is complete and accurate. In this case, the document will be available publicly as part of your Form 990-PF. 

• Line 8a—A foundation must submit the Form 990-PF to states where it is registered or incorporated, where the principal office is located, and sometimes where a main staff person operates or where the foundation maintains a checking account. Check the specific laws of all states in which you have operations.

Part VII-B

• Line 1a—Foundations that pay compensation, furnish facilities, reimburse expenses, or engage in other transactions with disqualified persons should check “Yes” where appropriate. 

• Line 1b—If the foundation engaged in any activities described in Line 1a, but did so in ways that qualify as exceptions under the self-dealing rules, the foundation may check “No.” If an activity did not qualify as an exception, the foundation must check “Yes” and file Form 4720, and ought to consult an attorney. 

• Line 3a—A private foundation, together with its disqualified persons, is prohibited from owning more than 20% (or 35% in certain cases) of any business enterprise. A foundation usually has 5 years to sell off any excess holdings and can apply for an extension.

Part VIII

• Line 1a—Do not use home addresses or other personal contact information. The IRS accepts a preferred address such as the foundation’s business address or a P.O. Box. 

• Line 3—Be sure to include all investment fees, even those paid directly from investment accounts. Check with your investment advisor for this information.

Part X

• Line 1—Be sure to include only those assets not used or held for use for charitable purposes. 

• Line 6—The mandatory distribution will be prorated if your foundation is reporting for a short year.

Part XI

• Line 4—Include recoveries of PRIs and any returned grants here.

Part XV

• Line 2—Be sure to check the box if your foundation gives only to preselected charitable organizations and does not accept unsolicited proposals. If your foundation makes grants under other conditions, complete Lines 2a–d. 

Related resources

Filing the Form 990-PF, a 50-page primer available in PDF (free to Exponent Philanthropy members) or hard copy

Tax & legal FAQs, including FAQs on completing the Form 990-PF 

Program Manager Akilah Massey focuses her energy on planning educational programs—including the recent CONNECT conference and 990-PF Tax Seminar—and dedicates a portion of her time to managing resources on technology tools and networks that can help members work more efficiently and effectively. Akilah has been with Exponent Philanthropy for more than 8 years and was previously program coordinator at a Cleveland-area children’s rehabilitation hospital.