Private foundations are subject to several sections within the Internal Revenue Code (IRC). The list below is not comprehensive, but it addresses the 8 main sections that will guide foundation managers throughout the life of the foundation. These include the following IRC sections:
- 4940 imposes an annual excise tax of 2% (or 1% in certain cases) of a private foundation’s net investment income. Foundations will need to pay taxes on an expanded list of income types for tax years starting after August 17, 2006. 6655 and 6656 require all private foundations to pay quarterly estimated taxes for this purpose.
- 4941 imposes a tax on any individual who commits an act of self-dealing with the foundation. Section 4946 defines the term “disqualified person.”
- 4942 imposes a tax on any foundation that does not meet the annual distribution requirement which is about 5% of the foundation’s assets. Private foundations will no longer be able to include grants to certain supporting organizations in their distribution requirement.
- 4943 imposes a tax on a private foundation’s excess business holdings if not divested in a specific time period.
- 4944 imposes an excise tax on a foundation for making investment decisions which would jeopardize the foundation’s charitable purpose.
- 4945 imposes an excise tax on any expenditure made by a private foundation which is outside certain guidelines, unless certain requirements are met. These include non-charitable expenditures, grants to individuals, grants to certain supporting organizations, lobbying expenditures, and more.
- 6033 requires all private foundations to file annual information returns (990-PF), sending copies to state officials.
- 6104 requires foundations to make certain documents available for public inspection, including the 990-PF, the 990-T, and the 1023 with all related correspondence.
- In addition, private foundations are subject to state laws.
Each requirement carries with it a penalty which varies in severity.
For a solid, clear overview, see our top-selling primer Legal Essentials for Small Foundations