What are Private Foundation Excise Taxes?

There is an excise tax on the next investment income of most domestic private foundations. This tax must be reported on Form 990-PF, Return of Private Foundation, and must be paid annually at the time for filing that return or in quarterly estimated tax payments if the total tax for the year is $500 or more. In addition, the Internal Revenue Code contains five provisions that impose two-tier excise taxes on private foundations, foundation managers, or other disqualified persons that engage in certain prohibited acts. These are:

(1) the taxes on self-dealing between private foundations and their substantial contributors or other disqualified persons;

(2) requirements that the foundation annually distribute income for charitable purposes;

(3) taxes on certain business holdings;

(4) penalty excise taxes designed to discourage behavior detracting from a foundation's ability to further charitable purposes; and

(5) penalty taxes on certain foundation expenditures. These penalty excise taxes are reported and paid on Form 4720

Violation of these provisions give rise to taxes and penalties against the private foundation and, in some cases, its managers, its substantial contributors, and certain related persons. The first tier (initial) tax is automatically imposed if the foundation engages in a prohibited act. With the exception of self-dealing acts under section 4941, the initial taxes may be set aside if it is established that (1) a taxable event was due to reasonable cause and not to willful neglect, and (2) the event was corrected within the correction period.

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