Tax Challenge for Private Foundations: Mastering the May 17 Deadline for Form 990-PF

Every year, private foundations in the U.S. are required to file a highly specialized and complex tax form: the 990-PF. For foundations that operate on a calendar year, this return is due on May 17, 2021.

“The 990-PF can yield significant savings if prepared correctly; if filed incorrectly, it can subject a foundation to unwanted scrutiny and penalties,” said Jeffrey Haskell, chief legal officer for Foundation Source, the nation’s largest provider of support services to private foundations.

As high-net-worth individuals, families and corporations with private foundations depend on the successful timing of this complex form, Foundation Source offers the following tips:

Opportunities for Savings

These often-missed opportunities on the 990-PF can reap savings for private foundations:

Legitimate administrative expenses can count toward the minimum distribution requirement (MDR). Some preparers mistakenly believe that only grants will satisfy the MDR. This can cause a foundation to scramble unnecessarily to make hasty grants (and waste funds) to avoid a shortfall penalty.

Investment-related expenses can offset investment income. Failing to account for this can lead to a higher tax bill for the foundation.

Excise tax liability can be cut in half if certain requirements are met. Until Dec. 20, 2019, when the excise tax rate moved to a flat 1.39%, a foundation could qualify to cut its excise tax liability from two to one percent. Preparers often overlook the section of the 990-PF that helps determine eligibility on returns for tax years beginning prior to such date.

Excess grants can be “banked” as carryover to help satisfy a future year’s MDR. For any year in which a foundation grants significantly more than its MDR, the excess grants may be “banked” as grant carryover to help satisfy a future year’s MDR. The carryovers expire if not applied toward the foundation’s MDR within five years.

Common Pitfalls

The 990-PF is a potential minefield of costly mistakes:

Calculating the MDR incorrectly. If the MDR is miscalculated, and the foundation fails to meet its MDR in a given year, the foundation could be subject to a 30 percent penalty on the shortfall amount.

Using the accrual method of accounting to show satisfaction of MDR. Treasury regulations mandate that only cash basis accounting be used to determine whether a foundation has met its MDR. Using the accrual method could lead to a 30 percent penalty.

Failing to make estimated tax payments. Larger foundations with even moderate investment income may be required to make quarterly estimated tax payments. Failure to do so may result in penalties.

Failing to track foundation insiders. A private foundation is expected to document all individuals and organizations that are considered “insiders” or “disqualified persons.” Insiders, who include substantial contributors to the foundation, are prohibited from engaging in financial transactions with the foundation (sales, loans, leases, etc.). Engaging in such transactions may result in self-dealing violations and penalties. Any insider who engages in a self-dealing transaction is personally responsible for a 10% penalty, which may not be forgiven by the IRS even if inadvertent, well-intentioned, and beneficial to the foundation.

For more information on the 990-PF, visit here.