A Guide for Private Foundations: Tax Exemption and 990-PF Filing Requirements

Article Highlights:

• Tax compliance through Form 990-PF is about more than just appeasing the IRS — it significantly impacts your nonprofit’s reputation and standing among the public.
• Private Foundations vs. Public Charities: What’s the Difference?
• Requirements to Obtain Tax Exemption
• Applying for Tax-Exempt Status
• Form 990-PF: Annual Tax Filing Requirements & Form Elements
• Additional Filing Requirements
• Form 990-PF, Schedule B
• Form 990-T
• Deadline for Form 990-PF Filing
• Consequences of Failing to File Form 990-PF
• E-filing Form 990-PF is Mandatory
• Conclusion
• Footnote:

Tax compliance through Form 990-PF is about more than just appeasing the IRS — it significantly impacts your nonprofit’s reputation and standing among the public.

Even if your private foundation is fully exempt from taxes, your organization must still report certain information to the IRS annually. This ensures that your foundation operates according to IRS guidelines and also provides transparency for your nonprofit.

Taxes aren’t a walk in the park. The sheer volume of forms and documents can easily overwhelm even the most organized nonprofit. But fear not! With the right information and preparation, navigating tax season can be much more manageable.

While you should always seek expert tax advice, if you are running a nonprofit classified as a private foundation, this article will provide you with an understanding of some things you need to know to meet your foundation’s tax requirements — from obtaining tax exemption to annual tax reporting requirements — to ask all the right questions.

Private Foundations vs. Public Charities: What’s the Difference?

Although nonprofit organizations can be classified into numerous subcategories depending on their primary purpose and operation, the IRS primarily classifies nonprofits as either public charities or private foundations.

Before delving into the details of tax exemption and reporting, here’s a quick overview of how private foundations differ from public charities, according to the IRS:

Private foundations are nonprofit organizations that are organized and operated towards the purpose of serving the community. At the same time, most of their financial support comes from a single private source such as an individual, a family, or any sponsor, which is in contrast to public charities which receive a substantial part of their financial support from the general public.

Requirements to Obtain Tax Exemption

As you likely already know, the IRS has a set of requirements for organizations seeking to obtain tax-exempt status. Once these requirements have been met and the application has been approved, an organization is generally recognized as tax-exempt.

For private foundations, however, there are a few additional requirements to meet eligibility for tax-exempt status, including:

• Operational purpose: Private foundations should be established and operated for the furtherance of charitable, educational, scientific, or other exempt purposes as specified by the IRS.
• No part of the net earnings should benefit a private shareholder or individual associated with the organization.
• Involvement in political campaign activities by private foundations is limited.
• Similarly, involvement in lobbying activities by private foundations is also limited.
• Finally, private foundations should never engage in any activity that is against the law.

After meeting these additional requirements, a private foundation can also be eligible to apply for federal tax exemption.

Applying for Tax-Exempt Status

To be recognized as tax-exempt by the IRS, you will need to submit an application. As mentioned earlier, private foundations have additional requirements that must also be met.

Most private foundations are provided with tax-exempt status under U.S. Internal Revenue Code Section 501(c)(3). To apply for tax-exempt status under this section, a private foundation must file Form 1023 — Application for Exemption Under Section 501(c)(3) of the Internal Revenue Code.

Alternatively, your organization may be eligible to file Form 1023-EZ, provided it meets certain requirements. It’s important to note that these forms must be filed electronically.

Once your application is approved, the IRS will send you a determination letter confirming your organization’s tax-exempt status.

While most private foundations that obtain tax-exempt status are not subjected to federal income taxes, there may be an excise tax imposed on the net investment income of certain domestic private foundations. Additionally, some foreign private foundations are subject to a tax on their gross investment income derived from sources within the U.S.

Form 990-PF: Annual Tax Filing Requirements & Form Elements

Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation is the form you’ll need to file annually to maintain compliance with the IRS. 

Private foundations, although tax-exempt organizations, operate differently from traditional public charities. Consequently, the format and requirements for financial reporting also differ.

Traditional nonprofit organizations conduct programming throughout the year that directly correlates with their mission statement.

For example, a pet rescue organization will conduct adoption and foster programs, and an organization founded to promote childhood literacy may conduct afterschool programs for underprivileged children.

These direct activities serve their purpose. Consequently, their financial reporting on 990 returns reflects this. Public charities will need to furnish detailed information regarding these programs, including their funding sources and associated expenses.

On the other hand, a private foundation is generally set up to help fund these public charities. Therefore, their impact is less direct.

They may provide a grant that covers the cost of the pet rescue’s adoption events, or the funding needed to employ educators for the after-school literacy program. This is reflected in Form 990-PF, which focuses more deeply on information regarding the fund balance and program-related investments. This information is critical regardless of the financial size of the foundation.

As mentioned earlier regarding specific requirements for private foundations, public charities may select their applicable 990 Forms (990-EZ, 990-N, or 990) based on their gross receipts and assets. However, private foundations are required to file Form 990-PF regardless of their financial status.

Check out A Beginner’s Guide to Filing a Form 990 for Your Nonprofit Organization for more information.

Additional Filing Requirements

In addition to your Form 990-PF, you may need to tick a few additional boxes and provide some extra information to fulfill your organization’s annual filing requirements, such as completing and attaching a Schedule B to the 990-PF, and filing an additional form (990-T) if it applies.

Form 990-PF, Schedule B

If the private foundation received a contribution of $5,000 or more from any one contributor during the tax year, you must report additional details regarding that on Schedule B — which requires you to provide detailed information about the contributor(s), noncash contributions, and other gifts received by the organization.

Form 990-T

A universal requirement for all nonprofit organizations mandates that any organization involved in businesses or trades that aren’t related to any exempt purposes and generate an income of $1,000 or more must also file Form 990-T. 

Deadline for Form 990-PF Filing

While most people associate January to April with being the busiest time for businesses and individuals in terms of tax filing, it’s the following month of May that is often the busiest time of the year for nonprofits and private foundations.

Generally, the deadline for filing 990 returns for private foundations (and all other nonprofit organizations) is the 15th day of the fifth month after the end of an organization’s accounting period.

Therefore, an organization operating on a calendar tax year will have a May 15 deadline.

Operating on a fiscal tax year? Consult the table below to find your organization’s deadline:

Fiscal year begins	Fiscal Year ends	Deadline to file 990 Returns
January 1	December 31	May 15
February 1	January 31	June 15
March 1	February 28	July 15
April 1	March 31	August 15
May 1	April 30	September 15
June 1	May 31	October 15
July 1	June 30	November 15
August 1	July 31	December 15
September 1	August 31	January 15
October 1	September 30	February 15
November 1	October 31	March 15
December 1	November 30	April 15

Keep in mind that, if the deadline falls on a weekend or any federal holiday, the due date will be pushed to the next business day.

Consequences of Failing to File Form 990-PF

Failing to file Form 990-PF returns can result in serious consequences for both your organization’s finances and its overall status. On the financial side, nonprofits that miss the deadline for filing Form 990 may face daily penalties, ranging from $20 to $110 depending on the organization’s gross receipts.

Moreover, if a nonprofit fails to file Form 990 for three consecutive years, it risks automatic revocation of its tax-exempt status. This means the organization will no longer be exempt from paying federal income taxes.

If the organization is no longer tax-exempt, it will be treated as an estate or trust and will be required to file its tax return and pay income taxes accordingly.

While organizations can apply for the reinstatement of tax-exempt status, it can be a long and tedious process with its own share of paperwork. Working to remain in good standing with the IRS is the best option for every private foundation.

Plus, the loss of tax-exempt status, even if reinstated, can have long-lasting and costly consequences — such as the loss of trust from the public.

E-filing Form 990-PF is Mandatory

With the enactment of the “Taxpayer Act of 2019,” the IRS now mandates that nonprofits file their 990 forms electronically — paper options are no longer available.

This means that the designated staff member or board member responsible for 990-PF filings will need to select an e-file provider. This will typically be the accounting manager, CFO, or even a board member who is qualified to provide a clear picture of the organization’s overall financial health and has insight into operations and funding.

When deciding on an e-file provider, there are some specific attributes that you’ll need to consider. Choosing a provider that doesn’t fit all your needs can create more administrative work for your organization in the future, whereas choosing wisely should save you time and promote the accuracy of your filings!

Here are some questions you should consider when vetting a provider:

1. Are they an IRS-authorized e-file provider? If not, they do not have secure access to the IRS e-file systems and certainly shouldn’t have access to your tax information.
2. Do they support every 990 Series Return? There is more to consider than just Form 990-PF. Does the provider support Schedule B? What about the 990-T for reporting unrelated business income (UBI)? You may also need to file an amended return or get caught up on a prior year’s return. Make sure you choose a provider that can meet all of these needs.
3. Do they offer features that will help you file? Choosing a provider with extra features that appeal to your organization is always a good idea. For example, do you need to be able to give multiple members of your team access to the filing process? Do you need to share the 990-PF return with board members or the director before final transmission? Is there any built-in audit system to help you avoid common filing mistakes?
4. Do they offer customer support? You may run into questions during the e-filing process, while an e-file provider is not a substitute for a tax preparer or CPA, they will be able to assist with the e-filing process and address form-related questions. During any process, having access to a real person on the other side of the phone or email will give you added confidence and peace of mind.

Of course, not every organization will choose to handle 990 filing in-house. If this is the case, finding a tax preparer with a good reputation, adequate experience, and an understanding of nonprofit tax returns is a must. The IRS provides a database of tax preparers and CPAs to help businesses and nonprofits ensure they have access to a reputable professional.

Conclusion

Remember, tax compliance through Form 990-PF is about more than just appeasing the IRS — it significantly impacts your nonprofit’s reputation and standing among the public.

This form allows your organization to be transparent about how you utilize the donations and contributions received throughout the year.

This transparency assures potential donors of the good your nonprofit accomplishes, encouraging them to become contributing members. Strengthening your nonprofit’s public integrity alone makes filing Form 990-PF worthwhile!

In conclusion, by carefully navigating the 990-PF filing process and selecting the right support, foundations can not only ensure compliance but also seize the chance to showcase their mission and impact through this essential documentation.

Footnote:

1. Private foundations, as defined by the Internal Revenue Service (IRS), are 501(c)(3) tax-exempt organizations typically funded by a single source, such as an individual, family, or corporation, and operate with the primary goal of philanthropic activities, distinct from public charities which rely on broad public support. For more information, see the IRS website on the life cycle of a private foundation.

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