Private foundations are a unique and often overlooked form of philanthropic organizations. However, the IRS does have rules that govern the way these types of entities are taxed and how their income is used. If you're considering creating a private foundation or donating to one, it's important to understand the tax implications so that you can make informed decisions. You can check out this site to get more information about the tax rules of private foundations.
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The tax rules governing private foundations can be divided into two broad categories: those relating to the foundation's income tax return, and those relating to the foundation's excise tax liability.
1. Income Tax Return Rules
Private foundations must file an annual income tax return (Form 990-PF). The return must include information about the foundation's activities, finances, and compliance with the tax law.
The return must also disclose any transactions between the foundation and its "disqualified persons." Disqualified persons include the foundation's trustees, officers, and key employees; their families; and businesses they control. Transactions between a private foundation and a disqualified person are subject to special rules designed to ensure that they are fair to the foundation and do not result in undue benefit to the disqualified person.
2. Excise Tax Rules
Private foundations are subject to an excise tax on their net investment income. The excise tax rate is currently 2%. In addition, private foundations must pay an annual excise tax on their "unrelated business income" (UBI).
Private foundations are also subject to restrictions on their "self-dealing" activities. Self-dealing refers to transactions between a private foundation and its disqualified persons. These transactions are prohibited unless they meet certain requirements designed to ensure that they benefit the foundation and not the disqualified person.
Finally, private foundations must comply with rules regarding their charitable distributions. Foundations must distribute at least 5% of the fair market value of their non-charitable assets each year, or pay an excise tax on the excess.