Year-End Tax Compliance Issues for Private Foundations
Year-End Tax Compliance Issues for Private Foundations
December 1, 2017
Another calendar year is rapidly drawing to a close. As such, now is the perfect time for foundations to make their assessments of tax compliance and year-end tax issues. To assist in these assessments, we offer thoughts regarding the issues outlined below. Please give us a call if we may provide assistance to help you achieve the best result.
Minimum Charitable Distributions
Foundations must distribute at least the minimum charitable distribution (MCD) for charitable purposes prior to December 31, 2017. The required distribution amount is found on the 2016 Form 990-PF page 9, Line 6f. Contact us if you have questions because your 2016 return has not yet been finalized. We recommend you compare the MCD with the amount of the grants your foundation has paid to-date to be sure that it satisfies the requirement. There is a 30% tax assessed for each year of under-distribution until the deficiency is corrected. Qualifying payments must be made in cash or securities (pledges or accrued grants payable do not count). Certain asset acquisitions, usually those related to exempt function activities, do count, plus an allocable portion of administrative costs (but NOT investment expenses). You may want to coordinate this requirement with the potential of achieving the lower 1% excise tax rate on investment income described in the next paragraph. Also, we recommend you not cut this calculation too close, as any excess carries over to the 2018 MCD requirement.
Excise Tax on Investment Income
A 2% excise tax is imposed on a Foundation’s net investment income (dividends, interest, rents, royalties, capital gains and similar types of income, net of related expenses). Foundations have an opportunity to cut that rate in half if a mathematical calculation based on historic five-year payout rates is satisfied. Please contact us for assistance if you think you may be able to achieve the 1% rate for 2017.
Capital Gains and Losses
A net capital loss for the year cannot be carried over to the following year or deducted against other types of investment income reportable for 2017. Thus, there is no tax benefit for net realized capital losses at year end. Capital gains and losses to date should be tallied to evaluate the desirability of generating capital gains to offset any net losses. If securities are sold to realize a gain, the “wash sale rule” does not apply to a private foundation so that the same stock can be immediately repurchased without any negative effect other than the commissions involved.
Grants to other private foundations, Type III non-functionally integrated supporting organizations, and non-501(c)(3) organizations must be documented with a pre-grant inquiry, supported by an executed Expenditure Responsibility agreement prior to payment, and reported on Form 990-PF until grantee reports indicate that the funds have been correctly expended by the grantee. Otherwise, such payments are subject to a 20% tax. We recommend that you review your procedures for identifying the tax classification of grantees. Grants made to organizations recognized by the IRS as “public charities” do not require these special steps. To determine whether a grantee is a public charity, you may visit the Grant Safe portion of Foundation Source’s website and view the potential grantee’s certification. If you are uncertain whether the procedures used by your foundation to determine a grantee’s status correctly identifies such organizations, we have checklists available to help evaluate your procedures.
Grants of Appreciated Assets
When appreciated securities are transferred to a grantee, the amount of appreciation inherent in the asset is not taxed as realized gain. The fair market value of the asset on the date of the transfer is considered to be a distribution for charitable purposes. If a Foundation has appreciated marketable securities, a considerable tax savings can be realized if shares are transferred to the grantee, rather than selling the security first and distributing the after-tax proceeds. The ability of the grantee to accept and manage the sale of the asset must, of course, be taken into consideration.
Estimated Excise Tax
For most foundations, the excise tax on investment income is paid quarterly. The amounts and due dates are reflected on the cover letter transmitting the 2016 Form 990-PF. Large foundations are required to base the estimates on actual net income. Please contact us if we can assist with the calculation. The 4th quarter payment is due December 15th,
If the Foundation has purchased any alternative investments, particularly offshore/foreign investments, we recommend that you contact us to obtain our memos and checklist on potential tax reporting and income tax consequences of business income earned by the investment partnership or other non-corporate entity.
For many of our clients, we receive paper copies of monthly statements from financial institutions to assist in the preparation of annual returns. If your foundation is among this group, we would greatly appreciate it if you contact the institution(s) to authorize them to transmit such statements electronically in the future.
We will be happy to discuss any questions this information brings to your attention. We appreciate your engagement of our services and are pleased to do our best to maximize tax matters for your private charity.