Form 990-PF: Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation

Form 990-PF: Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation

Form 990-PF is an essential document for private foundations and certain nonexempt charitable trusts under Section 4947(a)(1) of the Internal Revenue Code (IRC). It serves as an information return to the IRS and provides details on the foundation’s financial activities, grants, investments, and compliance with the tax-exempt status rules. Understanding the form’s requirements and how to properly complete it is crucial for organizations to stay in good standing with the IRS.

In this guide, we will cover what Form 990-PF is, who is required to file it, its key sections, and common mistakes to avoid.

What is Form 990-PF?

Form 990-PF is used by private foundations, as well as by Section 4947(a)(1) nonexempt charitable trusts that are treated as private foundations, to report their financial information and activities to the IRS. It’s a mandatory filing for tax-exempt organizations that fall under these categories. The form is similar to Form 990, but specifically tailored for foundations, which have different rules and reporting requirements than other tax-exempt organizations.

The purpose of Form 990-PF is to ensure that private foundations are adhering to federal tax laws related to charitable giving, investment income, and self-dealing. It also allows the IRS to monitor the foundation’s operations and verify that it is using its funds for charitable purposes.

Who Must File Form 990-PF?

The following entities are required to file Form 990-PF:

1. Private Foundations: These are non-profit organizations that generally receive their funds from a single source, such as an individual, family, or corporation, and typically distribute grants to other charitable organizations.

2. Nonexempt Charitable Trusts: A Section 4947(a)(1) nonexempt charitable trust is a trust that has not qualified as a tax-exempt entity but is still subject to private foundation rules. These entities are treated similarly to private foundations for tax purposes and must file Form 990-PF.

3. Foreign Foundations: If a private foundation operates outside the United States but still falls under the IRS rules, it may also need to file Form 990-PF, although foreign organizations often have additional compliance requirements.

Key Sections of Form 990-PF

Form 990-PF is divided into several sections that must be completed in detail. Each section asks for specific information regarding the foundation’s activities, income, and financial distributions. Below are the main sections of the form:

1. Part I: Analysis of Revenue and Expenses

This part provides an overview of the foundation’s revenues, expenses, and net assets. Key elements include:

• Total revenue from charitable contributions, investment income, and other sources.
• Total expenses, including operational and programmatic costs.
• Net investment income, which is crucial for determining the foundation’s excise tax liability.

2. Part II: Balance Sheet

The balance sheet includes information about the foundation’s assets, liabilities, and net worth. Foundations must disclose:

• Cash and investments held by the foundation.
• Accounts payable and other liabilities.
• Net assets, broken down into unrestricted, temporarily restricted, and permanently restricted.

3. Part III: Statement of Program Service Accomplishments

This section provides information about the foundation’s charitable activities. Foundations must describe their programmatic achievements and how funds were spent on their mission. They must also list the grants made to other organizations.

4. Part IV: List of Officers, Directors, Trustees, and Key Employees

Foundations must list their board members, executive officers, and key employees, along with their compensation, which helps ensure transparency and accountability in leadership.

5. Part V: Grants and Contributions

In this section, the foundation must provide detailed information about its grants, including:

• Grants made to public charities and other organizations.
• Contributions received from donors.
• Details of self-dealing transactions (if applicable).

6. Part VI: Schedule of Investments

This part reports on the foundation’s investments, including stocks, bonds, and real estate. It also covers any liquid investments and discloses the market value of the foundation’s holdings.

7. Part VII: Excise Tax on Investment Income

Private foundations are subject to an excise tax on their investment income. This part of the form calculates the amount of excise tax the foundation owes to the IRS.

8. Part VIII: Compliance with the Self-Dealing Rules

This section ensures that the foundation is not engaging in self-dealing, a prohibited activity under tax-exempt status rules. Foundations must disclose any transactions involving disqualified persons, such as substantial donors or board members.

9. Part IX: Summary of Changes in Net Assets or Fund Balances

This part outlines any changes in the foundation’s net assets or fund balances over the reporting period.

Common Mistakes to Avoid

Filing Form 990-PF is a detailed process, and it’s important to avoid errors that could lead to penalties or loss of tax-exempt status. Here are common mistakes foundations should avoid:

1. Failing to File on Time: Private foundations must file their return by the 15th day of the 5th month after the end of their fiscal year. If they fail to file on time, they could face penalties.

2. Incorrect Reporting of Investments: Foundations must accurately report the market value of their investments. Failing to do so can result in penalties or inaccurate tax liability calculations.

3. Underreporting Grant Distributions: Foundations are required to meet a minimum distribution requirement (usually 5% of their assets) each year. Failure to report this correctly can raise red flags with the IRS.

4. Missing Financial Statements or Schedules: Be sure to include all required schedules and attachments, including information on board members, financial statements, and grant distributions. Missing documents can delay processing.

5. Not Reporting Self-Dealing Transactions: Any transactions between the foundation and disqualified persons (such as board members or major donors) must be disclosed. Failing to report self-dealing can result in severe penalties.

Conclusion

Form 990-PF is a critical filing requirement for private foundations and Section 4947(a)(1) nonexempt charitable trusts. It provides transparency about the organization’s financial status and activities, helping the IRS ensure compliance with tax laws. By understanding the form’s sections and requirements, foundations can avoid common mistakes and maintain their tax-exempt status.