Avoid Compliance Mistakes! A Guide for Private Foundations
Private foundations play a vital role in philanthropy, supporting a wide range of charitable causes. In today’s uncertain environment, it is more important than ever for foundations to make sure that they are operating in full compliance with applicable tax laws and accounting standards. This article highlights key tax and accounting compliance areas that private foundations should prioritize to stay healthy and compliant.
Although most private foundations operate with integrity, even minor missteps in compliance can have serious consequences, including excise taxes, penalties, or in extreme cases, loss of tax-exempt status.
Governing boards and finance teams should periodically revisit their compliance strategies and internal controls, to promote ongoing compliance and mitigate unnecessary risks.
Core Areas of Tax and Accounting Compliance
Annual Reporting and IRS Filings
Private foundations must file Form 990-PF annually with the Internal Revenue Service (IRS). This form includes annual financial information, a list of grants awarded, and disclosures about investments and operations. Form 990-PF is open to public inspection.
- File Form 990-PF by the 15th day of the 5th month after the foundation’s tax year end. A 6-month extension of time to file is also available. For a foundation using a calendar year, the initial deadline for filing is May 15, and the extended deadline is November 15.
- Include accurate financial information, compensation information, and disclosure of substantial contributors and grantees.
- Disclose any restricted activities, as described below.
Excise Tax Compliance
Private foundations are subject to a 1.39% excise tax on their net investment income. This tax is reported on Form 990-PF, and it must be paid annually at the initial filing deadline for that return (e.g. by May 15 for a calendar year), or in quarterly estimated tax payments.
Private foundations are also subject to the following requirements:
- Restrictions on self-dealing between the private foundation and its insiders;
- Failure to annually distribute sufficient income for charitable purposes;
- Limits on holdings in private businesses;
- Provisions that investments must not jeopardize the carrying out of exempt purposes; and
- Provisions to assure that expenditures further exempt purposes.
Failure to comply with these provisions may trigger taxes and penalties for the private foundation and, in some cases, for its managers, substantial contributors, and related persons. Understanding these rules and implementing strong controls are critical to preventing violations and ensuring ongoing compliance.
Political and Lobbying Activities
As with all section 501(c)(3) organizations, private foundations are absolutely prohibited from participating in, donating to, or intervening in any political campaign on behalf of (or in opposition to) a candidate for public office. Any such activity can result in loss of the foundation’s tax-exempt status.
A key difference between section 501(c)(3) public charities and private foundations relates to lobbying activities – that is, efforts to influence legislation at the federal, state, or local level. Public charities may engage in a limited amount of lobbying, without risking penalties or loss of tax-exempt status. In contrast, when a private foundation conducts lobbying activities, they are treated as taxable expenditures subject to an excise tax and correction provisions. This restriction generally acts as a prohibition on lobbying for private foundations. Note: a private foundation may be considered to engage in lobbying or political activities if grants made to grantees are used for these purposes.
Private foundations may engage in nonpartisan educational activities and related advocacy efforts. Foundations should make sure that their staff are trained on what activities constitute lobbying, as opposed to permissible educational and advocacy efforts, to avoid unintended penalty charges.
Unrelated Business Income Tax
Like all section 501(c)(3) tax-exempt organizations, private foundations are subject to income tax on any unrelated business taxable income incurred.
The unrelated business income tax (UBIT) is imposed on income from an unrelated business activity, which is generally defined as income from a trade or business, which is regularly carried on, and is not substantially related to the organization’s exempt purpose.
An unrelated business activity can be conducted directly by the foundation or indirectly, such as by a partnership in which the foundation has invested. If the activity is conducted by a partnership, the foundation’s unrelated business income equals its share of the partnership’s business income that would be unrelated income, if the foundation conducted the activity directly.
To calculate UBIT, the foundation can reduce its gross income by the expenses incurred in conducting the unrelated business activity. UBIT is taxed at the federal corporation tax rate, which is currently 21%. UBIT may also be subject to applicable state and local income or franchise taxes.
A private foundation with $1,000 or more gross income from an unrelated business must file Form 990-T, Exempt Organization Business Income Tax Return, with the IRS. Form 990-T is filed in addition to Form 990-PF, and it has the same filing deadlines and payment due dates as Form 990-PF.
We recommend that foundation managers review their various revenue streams, to determine whether any of them may give rise to UBIT.
Final Thoughts
Compliance does not have to be overwhelming, but it does require intention and regular attention. By staying focused on such key requirements as timely filings, excise tax considerations, and restrictions on lobbying and unrelated business activities, private foundations can significantly reduce risk and avoid unnecessary penalties. Thoughtful governance practices, routine compliance check‑ins, and ongoing education for board members and staff help create a strong foundation for long‑term success. Taking a proactive approach to compliance not only protects your tax‑exempt status, but also reinforces your commitment to responsible stewardship and strengthens confidence among donors, grantees, and the communities you serve.
Contact Us
If your private foundation needs help navigating its compliance requirements, please contact us at the information below, or any member of your GRF team.
