Page 79 - Washington Nonprofit Handbook 2018 Edition

The special restrictions and excise tax rules applicable to private foundations
are set forth under sections 4940 through 4944 of the Code. They include:

y Excise Tax Based on Investments. Section 4940 imposes a 1-2%
excise tax on investment income, such as interest, stock dividends,
capital gains and other passive income.

y Taxes on Self-Dealing. Under section 4941, transactions between a
private foundation and certain organizational insiders (including
private foundation managers, large contributors and companies
owned by large contributors) generally are prohibited unless a special
exception applies.

y Taxes on Failure to Distribute Income. Each year a private
foundation must distribute a minimum amount of its income for
charitable purposes. If it does not, it will be subject to an excise tax
under section 4942.

y Taxes on Excess Business Holdings. A private foundation may be
subject to an excise tax under section 4943 if it owns more than a
certain percentage of a trade or business enterprise.

y Taxes on Investments that Jeopardize Charitable Purposes. Under
section 4944, a private foundation may be subject to excise tax if it
cannot carry out its charitable purposes by making high-risk
investments. This tax provides an incentive for private foundation
managers to be prudent when investing private foundation funds.

y Taxes on “Taxable Expenditures.” Section 4945 imposes a tax on
amounts spent by private foundations that are used for carrying on
propaganda or otherwise attempting to influence legislation,
influencing the outcome of political campaigns, and making
expenditures for noncharitable purposes. Section 4945 further
regulates the use of private foundation funds for certain other
activities by placing limitations on grants to individuals for travel,
study, or other similar purposes (unless the private foundation follows
certain procedures approved in advance by the IRS) and by taxing
grants made to organizations other than public charities (unless the
grantor private foundation exercises expenditure responsibility with
respect to such grants).

WASHINGTON NONPROFIT HANDBOOK -68- 2018