Hidden Tax Savings and Costly Pitfalls for Private Foundations

Categories: Press Releases

FAIRFIELD, Conn., April 30, 2019 –  According to the IRS, there are more than 86,000 private foundations in the United States, and every year, each one is required to file a highly specialized tax form: the 990-PF.  For foundations that operate on a calendar year, this return is due on May 15th.

“In the hands of an experienced preparer, the 990-PF can yield significant savings; in the wrong hands, it can expose a foundation to scrutiny and penalties it never saw coming,” 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. A foundation may 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.
  • 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 are considered carryovers that can be applied to the foundation’s MDR within the next 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 and cause the foundation to become ineligible for the reduced excise tax rate for five years.
  • 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.

For more information on the tax benefits of private foundations, visit here.

About Foundation Source (www.foundationsource.com)

Foundation Source is the nation’s largest provider of comprehensive support services for private foundations. Our complete outsourced solution includes foundation creation (as needed), administrative support, active compliance monitoring, philanthropic advisory, tax and legal expertise, and online foundation management tools.

Now in our second decade, Foundation Source provides its services to more than 1,500 family, corporate, and professionally staffed foundations, of all sizes, nationwide. We work in partnership with wealth management firms, law firms, accounting firms, and family offices as well as directly with individuals and families. Foundation Source is headquartered in Fairfield, Connecticut.