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Accounting

Understanding Form 990-PF instructions and the basics of private foundations

Melissa Vance, CPA  Tax & Accounting Lead Editor • Product - Research Products, Thomson Reuters

Melissa Vance, CPA  Tax & Accounting Lead Editor • Product - Research Products, Thomson Reuters

Philanthropy and private foundations have been around for more than a century. A number of individuals and families who made their wealth during the late 19th and early 20th centuries in the railroad, steel, oil, and automobile industries (such as Sage, Carnegie, Rockefeller, and Ford) made large-scale donations. Many of their donations occurred before income taxes were enacted in 1913 or estate taxes in 1917. Andrew Carnegie may be the most influential philanthropist in American history. His donations are believed to have exceeded $350 million, roughly $5.5 billion today. That number amounted to almost 90 percent of his fortune.

Form 990-PF and Form 990-PF Instructions

Private foundations file Form 990-PF, Return of Private Foundation. The form consists of sixteen sections covering but not limited to the analysis of revenue and expenses, balance sheets, analysis of changes in net assets or fund balance, investment income reporting, and excise tax calculation. Along with the specific line items, the Form 990-PF instructions provide guidance as to the filing requirements, definitions, payment of taxes, penalties, and public inspection requirements.

Before you dig into the requirements for filing Form 990-PF, it’s important to understand the basics of private foundations and if your entity qualifies.

The beginnings of private foundations

The first private family foundation in the U.S., the Russell Sage Foundation, was established in 1907 by Margaret Olivia Sage to improve social and living conditions. In 1911, the Carnegie Corporation of New York was founded by Andrew Carnegie with a donation of $125 million to promote the advancement and diffusion of knowledge and understanding. The Rockefeller Foundation was started in 1913 by John D. Rockefeller with a gift of $35 million to promote the well-being of humanity throughout the world. However, until 1969, the term private foundation was not defined in the United States Internal Revenue Code.

The rise of private foundations

There are approximately 140,000 private foundations in the United States with revenues of $120 billion and assets totaling $1.028 trillion, and the number of private foundations is on the rise. According to Hannah Shaw Grove of Foundation Source, giving, in general, is up due to the heightened awareness of increased need, social crisis, and generational generosity. She writes:

“While the gulf between America’s haves and have-nots has been widening for decades, the gap grew even wider during the pandemic. The weight of the public health crisis fell unequally on the vulnerable, with millions of Americans unable to afford or access essentials such as food, health care, housing, and broadband. Against a backdrop of seemingly endless lines at food pantries — even on military bases — extravagant displays of wealth may seem insensitive as well as immoderate. COVID wasn’t the only emergency in 2020. Racial equity, social justice, and our polarized political environment — all featured prominently in our national conversation over the course of the year and caused many people to think more seriously about how they could use their assets to influence society positively. In addition, nearly three-quarters of millennials have sent financial aid to family or friends or donated to a nonprofit since the pandemic began, according to payment app Zelle’s September Consumer Payment Behaviors report. That’s the highest rate among any of the generational cohorts polled.”

Private Foundation Versus Public Charity

Today, every U.S. charity that qualifies under Section 501(c)(3) of the Internal Revenue Service Code as tax-exempt is a “private foundation” unless it demonstrates to the IRS that it falls into another category, such as public charity. Private foundations are generally subject to an excise tax on any net investment income. Unlike a public charity, which relies on public fundraising to support its activities, the funding for a private foundation typically comes from a single individual, a family, or a corporation. Because a private foundation stays under the donor’s control, the donor determines the mission, whom to include on the board, where the funds are invested, and how and where funds are given away. The word “foundation” is commonly incorporated into the names of many different types of nonprofits, but not all of these are private foundations. The Bill and Melinda Gates Foundation is a private foundation, while the Make-A-Wish Foundation is a public charity.

Private foundation characteristics: does your entity qualify?

Private foundations:

  • are established for charitable purposes,
  • provide donors with a tax deduction for their contributions,
  • are managed by their own board of directors,
  • receive most of their financial support from and are usually controlled by their founders,
  • must make charitable distributions throughout their taxable year,
  • are tax-exempt organizations but must pay a nominal excise tax on their net investment income, and
  • are either non-operating or operating foundations.

With private foundations on the rise, it’s increasingly important for tax professionals to understand the qualifications and filing requirements.

Learn more about Form 990-PF

The on-demand course, Form 990-PF-Introduction and Parts I-V from Checkpoint Learning, provides a basic, but thorough discussion of private foundations and their federal tax compliance requirements. Upon completion of this intermediate-level course, you’ll earn 4 CPE credits and gain an expanded understanding of private foundations that you can use to advise current and future clients.”