A layman-friendly summary of the IRS Form 990-PF Return of Private Foundation for tax year 2014

What the Form Is For

Form 990-PF is the annual tax and information return that private foundations must file with the Internal Revenue Service. Think of it as a combination report card and tax form—it shows what your foundation did during the year, how much money it received and spent, and calculates any tax your foundation owes on its investment income.

Every organization recognized as tax-exempt under section 501(c)(3) falls into one of two categories: public charities or private foundations. Private foundations typically receive funding from a single source (like one family or corporation) and primarily make grants to other charitable organizations rather than running programs directly. Form 990-PF serves multiple purposes: it reports your foundation's financial activities, demonstrates compliance with special rules governing private foundations, calculates the excise tax on investment income (usually 2% of net investment income), and provides transparency to the public and regulators.

The form must be filed annually whether your foundation had any activity or income during the year. Even if your foundation sat dormant with no transactions, you still need to file. For section 4947(a)(1) nonexempt charitable trusts with no taxable income, Form 990-PF can also substitute for Form 1041 (the standard trust income tax return).

When You’d Use Form 990-PF

Late/Amended Filings

Standard Deadline

Form 990-PF for 2014 must be filed by the 15th day of the 5th month after your accounting period ends. For calendar-year foundations, that means May 15, 2015. For fiscal-year filers, count five months from your year-end date. If the deadline falls on a weekend or legal holiday, you get until the next business day.

Extensions

You can request an automatic 3-month extension using Form 8868, giving you until August 15 for calendar-year filers. If you need even more time, you can apply for an additional (non-automatic) 3-month extension, potentially extending your deadline to November 15. However, extensions to file are not extensions to pay—any tax owed must still be paid by the original May 15 deadline to avoid penalties and interest.

Amended Returns

Made a mistake on your original return? You can file an amended Form 990-PF by checking the "Amended return" box in Item G of the heading section. Common reasons include discovering unreported income, correcting distribution amounts, or fixing errors in excise tax calculations. If you file an amended return with the IRS, you must also send copies to any state officials who received the original return. Keep documentation explaining what changed and why.

Late Filing Consequences

The penalties for late filing are substantial. You'll face $20 per day ($100 per day if your foundation has over $1 million in annual gross receipts), up to $10,000 ($50,000 for large foundations) or 5% of gross receipts, whichever is less. The IRS can also impose a separate $10-per-day penalty (up to $5,000) on the responsible persons if they ignore a written demand to file. Most seriously, if you fail to file for three consecutive years, your tax-exempt status automatically revokes, converting you into a taxable private foundation.

Key Rules or Details for 2014

The 2% Excise Tax

Most domestic private foundations pay a 2% excise tax on net investment income, which includes interest, dividends, capital gains, rents, and royalties minus related expenses. However, foundations that significantly increased their charitable giving could qualify for a reduced 1% rate under section 4940(e). Exempt operating foundations—a rare category requiring broad public support and governance—don't pay this tax at all.

The Five Prohibited Activities

Private foundations face strict prohibitions unknown to public charities. Violating these triggers two-tier excise taxes reported on Form 4720:

• Self-dealing (section 4941): Any direct or indirect financial transaction between the foundation and "disqualified persons"—substantial contributors, foundation managers, their family members, or entities they control—is prohibited, even if the transaction benefits the foundation.
• Mandatory distributions (section 4942): Foundations must distribute approximately 5% of their investment assets annually for charitable purposes or face penalty taxes.
• Excess business holdings (section 4943): Foundations generally cannot own more than 20% of a voting business enterprise, combined with disqualified persons' holdings.
• Jeopardizing investments (section 4944): Investments must be prudent and not risk the foundation's ability to carry out its exempt purposes (speculative investments trigger penalties).
• Taxable expenditures (section 4945): Grants must further exempt purposes. Grants to individuals require IRS pre-approval of procedures; grants to non-501(c)(3) organizations require "expenditure responsibility" oversight.

Political and Lobbying Restrictions

Private foundations are absolutely prohibited from political campaign intervention. Any participation in political campaigns—endorsements, contributions, or partisan statements—risks revocation of exempt status. While public charities can conduct limited lobbying, private foundations face such severe excise taxes on lobbying expenditures (5% of the amounts spent) that it effectively acts as a prohibition.

Record Retention

You must maintain adequate records documenting all income sources, expenditures, grant procedures, and decisions. The IRS recommends keeping most records for at least three years after filing, though records relating to property should be kept as long as you own the asset plus three years.

Step-by-Step (High Level)

Completing Form 990-PF systematically prevents errors and omissions. The IRS recommends this sequence to minimize jumping between sections:

Step 1 – Calculate Investment Income (Part IV)

Start by figuring capital gains and losses from selling securities or other investments. This amount flows into multiple other sections.

Step 2 – Complete Financial Statements (Parts I & II)

Part I analyzes your revenue and expenses in four columns: (a) book values, (b) net investment income for tax purposes, (c) adjusted net income (primarily for operating foundations), and (d) charitable distributions. Part II presents your balance sheet showing assets and liabilities at year-beginning and year-end, plus fair market values for significant assets.

Step 3 – Fill in the Heading

Complete identifying information including your foundation's name, address, EIN, and tax year. Check boxes indicating if this is an initial return, final return, amended return, or change of address.

Step 4 – Reconcile Net Worth (Part III)

This section reconciles changes in your net assets from the beginning to end of year, accounting for revenue, expenses, and other adjustments.

Step 5 – Answer Activity Questions (Part VII-A)

These yes/no questions identify potential compliance issues: Did you engage in self-dealing? Make grants requiring expenditure responsibility? Hold excess business holdings? This section also requires listing your grant-making states and substantial contributors.

Step 6 – Report Officers and Compensation (Part VIII)

List all officers, directors, trustees, key employees, and highly compensated contractors earning over $50,000. Include compensation amounts and hours worked.

Step 7 – Calculate Minimum Investment Return (Parts IX-A through X)

Private non-operating foundations must calculate the 5% distribution requirement. Part X determines your minimum investment return based on the average fair market value of non-charitable-use assets.

Step 8 – Work Through Distributions (Part XII, lines 1-4)

Report your qualifying distributions—amounts spent directly on charitable programs, grants made, and reasonable administrative expenses allocable to charitable purposes.

Step 9 – Calculate Tax (Parts V & VI)

Part V determines if you qualify for the 1% reduced tax rate. Part VI calculates your actual excise tax liability, including credits for estimated tax payments.

Step 10 – Complete Distribution Requirements (Part XII, lines 5-6 & Part XI)

Calculate whether you met your distribution requirement and determine any carryover amounts.

Step 11 – Track Undistributed Income (Part XIII)

This complex section tracks distributions across multiple years to ensure the foundation meets its 5% annual payout requirement.

Step 12 – Address Special Situations (Parts VII-B through XVII)

Part VII-B covers activities requiring Form 4720 filing. Part XIV is only for private operating foundations. Parts XV-XVII cover supplementary information, grants analysis, and relationships with noncharitable exempt organizations.

Step 13 – Sign and Submit

The return must be signed by an officer authorized to sign (president, vice president, treasurer, etc.). Paid preparers must also sign and include their PTIN.

Common Mistakes and How to Avoid Them

Mistake #1: Incomplete Answers

Many filers leave questions blank instead of checking "Yes," "No," or "N/A." Every applicable line must have an entry. The IRS considers blank responses as incomplete returns subject to penalties.
Solution: Review each page methodically. If a part doesn't apply to your foundation, enter "N/A" or "None" clearly. Use zero when appropriate for total lines.

Mistake #2: Self-Dealing Blindness

Foundation managers often don't realize that seemingly beneficial transactions constitute prohibited self-dealing. Paying fair market value for a disqualified person's property, leasing office space from a trustee, or even receiving interest-free loans to the foundation are all self-dealing violations.
Solution: Before any transaction involving foundation managers, substantial contributors, or their family members, consult the self-dealing rules carefully or seek professional advice. The excise taxes apply even when the foundation benefits.

Mistake #3: Inadequate Grant Documentation

Foundations making grants to individuals without IRS pre-approval of procedures face automatic taxable expenditure penalties. Those making grants to foreign organizations or U.S. non-exempt entities without proper expenditure responsibility oversight face similar problems.
Solution: Before making your first grant to individuals, file Form 8940 requesting advance approval of your grant procedures. For grants to non-public charities, maintain detailed expenditure responsibility files including pre-grant inquiries, written agreements, and grantee reports.

Mistake #4: Ignoring the Estimated Tax Requirements

If your excise tax exceeds $500, you must make quarterly estimated payments. Underpaying triggers penalties, even if you ultimately pay the full tax with your return.
Solution: Calculate your expected excise tax early in the year. Make quarterly payments using EFTPS (Electronic Federal Tax Payment System). You can't pay estimated tax by check—electronic payment is required.

Mistake #5: Forgetting Fair Market Values

Foundations with at least $5,000 in assets must report fair market values in Part II, column (c). Many filers only complete book values, triggering an incomplete return.
Solution: Before year-end, obtain current valuations for publicly traded securities (use year-end closing prices) and appraisals for real estate or other substantial holdings. Document your valuation method.

Mistake #6: Missing State Filing Requirements

Form 990-PF must be sent to the Attorney General of your home state, incorporation state, and any state listed in Part VII-A, line 8a (where you make grants). Many foundations only file with the IRS.
Solution: Create a checklist of required state filings. Mail copies to each required Attorney General simultaneously with IRS submission. Track state-specific requirements which may exceed federal standards.

What Happens After You File

Public Disclosure

Unlike most tax returns, Form 990-PF becomes a public document. The IRS provides copies to anyone who requests them. Your foundation must also make copies available for public inspection at your principal office and provide copies upon request (you can charge reasonable copying and postage fees). Redact contributor names and addresses in Schedule B before public disclosure, but all other information remains public.

IRS Processing

The IRS processes your return and assesses any tax due. If you've made adequate estimated payments, you may receive a refund or owe a small balance. Payment is due with the return, regardless of extensions to file. The IRS may send notices if they identify mathematical errors, missing information, or inconsistencies.

Examination Possibility

The IRS may select your return for examination (audit). Private foundations receive more scrutiny than many other tax-exempt organizations due to the complex rules and significant tax incentives. Examinations typically focus on self-dealing transactions, distribution requirements, excess business holdings, and grant-making procedures. Maintaining complete records makes examinations proceed more smoothly.

State Follow-Up

State officials may also review your return. Some states conduct their own examinations of charitable organizations. Many states require separate registration and renewal filings for charitable solicitation, even if they accept Form 990-PF for annual reporting.

Revocation Risk

As mentioned, three consecutive years of non-filing triggers automatic revocation of exempt status. You'll receive notices before revocation occurs, but don't ignore them. Reinstating revoked status requires filing Form 1023 with the applicable user fee and demonstrating that the failure to file was for reasonable cause.

Going Forward

Form 990-PF information from prior years flows into future returns, particularly Part XIII tracking undistributed income over five years. Keep copies of all filed returns permanently—you'll need them to prepare future returns and demonstrate compliance history.

FAQs

1. Our foundation had no activity this year. Do we still need to file?

Yes. Form 990-PF must be filed annually regardless of whether you had income or made grants. Report zero amounts where appropriate, but file a complete return. The three-year non-filing revocation rule applies even to inactive foundations. If you're planning to dissolve, file final returns and follow proper termination procedures rather than simply stopping filing.

2. Can we file Form 990-PF electronically?

Most private foundations may choose electronic or paper filing for 2014. However, if your foundation (including related entities) files 250 or more returns of any type during the calendar year (including employment tax returns, W-2s, 1099s, etc.), you must file Form 990-PF electronically. The IRS may grant hardship waivers in limited circumstances. Electronic filing typically processes faster and reduces errors.

3. What's the difference between a private operating foundation and a grant-making foundation?

Private operating foundations spend at least 85% of their income (or minimum investment return, if less) directly conducting charitable programs rather than making grants. Think museums, research institutions, or libraries supported by a limited number of donors. They must also meet an assets test, endowment test, or support test. Grant-making (non-operating) foundations primarily make grants to other organizations or individuals. Operating foundation status provides benefits: donors receive higher deduction limits, and these foundations avoid certain distribution timing rules that apply to grant-makers.

4. How do we know if someone is a "disqualified person" for self-dealing purposes?

Disqualified persons include: substantial contributors (generally anyone donating over $5,000 if that exceeds 2% of total contributions received), all foundation managers (officers, directors, trustees, or anyone with similar authority), owners of more than 20% of entities that are substantial contributors, family members of all the above (spouses, ancestors, children, grandchildren, great-grandchildren, and spouses of children/grandchildren/great-grandchildren), and corporations, partnerships, trusts, or estates in which the above persons hold more than 35% beneficial interest. Once someone becomes a disqualified person, they remain so indefinitely. Government officials are also disqualified persons for self-dealing purposes.

5. What counts as a "qualifying distribution" toward our 5% payout requirement?

Qualifying distributions include: amounts paid directly to accomplish charitable purposes (like operating a charitable program), grants to public charities and operating foundations, grants to other private foundations that themselves become qualifying distributions within one year, reasonable administrative expenses necessary to make or monitor grants, and amounts paid to acquire charitable-use assets. Qualifying distributions do NOT include: investment management fees, excise taxes paid, amounts set aside without IRS approval, or contributions to non-charitable entities. The distribution must occur during the tax year or within 2½ months after year-end.

6. We need to pay $3,000 in excise tax for 2014. How do we pay?

Because your tax exceeds $500, you should have made quarterly estimated tax payments throughout 2014. For any remaining balance due, you must pay electronically using EFTPS (Electronic Federal Tax Payment System) or through your IRS-approved e-file provider if filing electronically. You cannot pay by check for amounts over $10. If you didn't make estimated payments, you may owe an underpayment penalty (Form 2220 calculates this, though the IRS will generally figure it for you). Going forward, enroll in EFTPS at www.eftps.gov or call 1-800-555-4477 to make quarterly payments by the 15th day of months 5, 6, 9, and 12 of your fiscal year.

7. We made a grant to help specific earthquake victims. Is this a taxable expenditure?

Grants to specific named individuals require IRS advance approval of your grant selection procedures under section 4945(g), even for disaster relief. Without approval, these grants are taxable expenditures subject to penalties. However, grants to public charities that provide disaster relief are permissible without special approval—the public charity can then help specific individuals. If you want to make grants directly to individuals for disaster relief, education, achievement prizes, or similar purposes, file Form 8940 to request advance approval of your objective selection procedures before making grants.

For More Information

2014 Instructions for Form 990-PF (IRS Publication)
Publication 4221-PF: Compliance Guide for 501(c)(3) Private Foundations
IRS Tax Exempt Organizations webpage
EO Help Line: 1-877-829-5500 (Monday-Friday)
This summary provides general information based on 2014 tax law and is not a substitute for professional tax advice. Consult a qualified tax professional for guidance specific to your foundation's situation.

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