Every year, many foundations file their IRS Form 990-PFs with inaccuracies and mistakes that can cost their wallet and reputation. Private foundations that don’t have the in-house technology to meet this requirement may seek assistance from tax advisors to avoid these errors.
One such example is that starting with the 2020 tax year, Form 990-PF must be filed electronically.
May 15 Deadline for Electronic Filing
The IRS has released the 2022 Form 990-PF and instructions—including the continued requirement to file electronically. As the May 15 deadline approaches, many foundations are already working with their tax advisor, or preparing this annual filing on their own.
This begs the question: Where should a private foundation focus when preparing or reviewing its Form 990-PF?
Form 990-PF Focus Areas
Part I: Analysis of Revenue and Expenses
- Is the foundation a cash or accrual basis taxpayer? If it has audited financial statements each year, accrual is likely the better choice for consistency. But that could involve an accounting method change.
- Has the foundation accurately reflected direct investment expenses against investment income and a reasonable allocation of indirect expenses?
- Are disbursements for charitable purposes reported on the cash basis only, which the IRS requires for column D?
Parts II & III: Balance Sheets & Analysis of Changes in Net Assets or Fund Balances
- Have you presented the breakout of investments by type correctly, and detailed out by investment in the appropriate supplemental statement?
- Have you presented unrealized gains and losses as other increases or decreases, rather than in investment income?
Part VI-A: Statements Regarding Activities
- Has the foundation properly responded regarding any attempts to influence any national, state, or local legislation, political activities, or new activities the foundation hadn’t previously engaged in?
- Did the foundation generate unrelated business gross income of $1,000 or more, and is therefore filing a Form 990-T?
- Did the foundation make changes, not previously reported to the IRS, to its governing documents?
You can answer several of these questions with a yes or no. However, they require a foundation to provide further explanation in a supplemental statement.
Part VI-B: Statements Regarding Activities (Which May Require Form 4720)
- Did the foundation conduct transactions with its founder, board members, officers, substantial contributors, family members, or the controlled entities of any of these individuals? Consider sales, property leases, borrowing, furnishing goods or services, and professional services or expense reimbursements.
- Did the foundation provide grants to individuals, non-charitable organizations, or for purposes other than religious, charitable, scientific, literary, or educational? Think about scholarships to individuals for travel, study, or other similar purposes; grants to foreign organizations; or program-related investments involving a for-profit entity.
Many of these activities may be subject to correction, payment of an excise tax by the disqualified person, and reporting on a Form 4720. You’ll want to give careful thought to the activities of the foundation for future purposes and not only for the filing of the Form 990-PF.
Part IX: Minimum Investment Return
- Has the foundation used the correct method for averaging cash balances, and a reasonable and consistent method for averaging the monthly fair market value of securities?
- Have you included all assets from Part II in the calculation that don’t have a direct correlation to charitable-use activities?
Private foundations that don’t include all non-charitable use assets, or calculate the fair market value incorrectly, are at risk of reporting a lower minimum investment return than they actually have. This could cause undistributed income and an excise tax that the foundation didn’t realize or intend.
An area of focus that may be helpful for a foundation more broadly is determining best practices for streamlining and structuring accounting to make the Form 990-PF information-gathering process more efficient and effective.
Want More Form 990-PF Tax Tips?
Filing the Form 990-PF
This publication can help your foundation meet its IRS requirements and continue to receive significant tax privileges that allow you to fulfill your charitable mission. Get your copy >>
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About the Author
Wendy Campos has practiced public accounting since 2000. She focuses on tax-exempt organizations, including private and public foundations, higher education institutions, hospitals, credit unions, trade associations, and other not-for-profit organizations. She can be reached at (503) 478-2165 or firstname.lastname@example.org.
Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory services offered through Moss Adams Wealth Advisors LLC.