Strategic Source Online

May 2004

Alert: Tax Time for Foundations!

December year end private foundations must file their IRS form 990-PFs by May 15. A couple of tips to remember…

• The excise tax on net investment income is 2%, but it can be reduced to 1% for each year during which the foundation’s qualifying distributions equals or exceeds its 5 year average payout plus 1% of the current year’s net investment income. So, if the foundation has been paying an average 5% every year and, in 2003, it paid out 6%, then the excise tax will drop to 1%. This is the incentive for distributing more than the minimum required.

 

• Net investment income includes net short-term and long-term capital gains from the sale of investment assets (such as stocks and real estate). Sometimes appreciated assets are sold to raise the cash needed for the grant distributions.  But, remember, a foundation can distribute the appreciated asset directly to the grantee and the gain will not be taxed. So, instead of selling appreciated stock and using the cash to distribute to a grantee, directly distribute the stock.   It will save the 2% tax!

FoundationSearch: Help Desk: An Introduction to the Form 990PF

The Foundation Center: Demystifying the 990-PF

The Foundation Center: Sample 990-PF

Update: No Change in the Status of H.R.7/Care Act Bills

Both are stalled and there is no current effort to reconcile the differences. Chances seem slim that this legislation, which has not been passed by one or both Houses in each of the last three years, will be enacted in this election year environment.

Independent Sector: Take action to move this legislation forward

Reminder: Self-dealing is a Serious Violation of Federal (and Most States) Law

It means a prohibited interaction between the foundation and a “disqualified person” (the founders, board members, officers, and certain related parties).  But sometimes self-dealing can occur without anyone realizing it, and it does not mean that the disqualified party benefited from the transaction.  For example, a lease between the foundation and a disqualified person is self-dealing, even if the lease payments were fair and competitive.  Loans and sales between the two parties also constitute self-dealing.

The mistake can be expensive.   The foundation managers (officers and directors) are subject to a 2 1/2% excise tax if they participate in the prohibited transaction, and the disqualified person is subject to a 5% tax on the amount involved in the self-dealing.  If the self-dealing is not corrected and the funds returned, then the self-dealer will be subject to an additional 200% tax. The final penalty, if the foundation has engaged in these prohibited transactions repeatedly, is the loss of exempt status and 100% forfeiture of the foundation assets.

California Tax Education Council (CTEC): Self-Dealing Policy

Planning Idea: How do you know whether your grant is accomplishing what you expected or hoped?

First, be sure you have a clear understanding of what would make your grant successful.  Do you have any objective or subjective criteria?  Does the grantee understand these criteria and has it indicated that it can, or will seek to achieve them?

Second, do you have a reporting or post-grant assessment process that will enable you to evaluate the results?  Effective grant making is a two way street.  The grantee needs support to assure that it can achieve its mission, and the foundation wants to be sure that its funds were well spent and productive.

IFF Advisors: Contact us for more information on establishing a grant program or improving your existing grant program

Events & Programs

Previous Issue

Refer Your Colleagues


For more information, please contact us.

Copyright © 2002-2008, IFF Advisors, Inc., All Rights Reserved. OWA