Tax planning is different for private foundations than other charitable organizations. Private foundations pay an excise tax. Generally started by a large individual donation from an individual or business, a private foundation is a nonprofit charitable organization. Unable to qualify as a public charity, the private foundation produces income by investing the primary donation in a variety of money making options. The private foundation has a board of directors or trustees to manage the distribution of funds to charitable causes.
Tax Tips to Help Your Private Foundations
Tax planning is a necessity for private foundations to meet IRS criteria. Exempt from paying income tax, private foundations must pay an excise tax of 1 to 2 percent on net investment income. Your private foundation’s tax liability is dependent on numerous operating factors. Keeping all the information up to date is essential for minimizing tax liability.
Being proactive with your recordkeeping methods is crucial. Waiting until the last minute to gather pertinent information for your bookkeeper or accountant may result in errors. Remind employees, managers, trustees, or the board of directors the importance of keeping ongoing and accurate records for tax time.
Keeping track of specific information will help determine the amount of tax liability for the year. The tax rate for a private foundation depends on the following:
- Grants: Distributing grants or donations to specific charities is the main purpose of a private organization. Document the amount of the grant, the individual or entity receiving the grant, and all the pertinent information for the IRS. As regulated by the government, a private foundation must distribute 5 percent of the non-charitable assets.
- Expenses: Keeping track of operating expenses is critical for deductions. Qualified expenses may include rent, employee or officer compensation, advisory fees, commission, and daily operating costs.
- Income: Continuing donations from the founder, another donor, or an investment produces a profit – record the amounts with backing documentation. Investment accounts may include stocks, bonds, real estate, interest earned, or mutual funds.
- Market Value of Assets: The current value of the private foundation’s assets is part of the calculation of the amount of taxes due. Keep track of the market value of all current assets, depletion of value, and new purchases for tax time.
If you are uncertain about a transaction, expense, or investment, save the information. Having too much information during tax season is better than too little. Reducing your excise tax is dependent on the combination of all the daily operating components.
Know Your Deadlines
Keep track of upcoming deadline for tax filing. Failing to file by the 15th day of the 5th month in the foundation’s accounting period may result in costly penalties exceeding thousands of dollars. If you cannot gather all your information by the deadline, request an extension. The extension will provide you with a sufficient amount of time to get your paperwork in order.
Private foundations are set up to help charitable causes. Decreasing tax liability with tax planning helps promote the charitable act of giving to deserving individuals or causes. If your foundation is looking for assistance in preparing documents for filing, contact the Certified Public Accountants at Ernst Wintter & Associates today. Our CPAs specialize in nonprofit audit service and assisting a variety of businesses comply with accounting regulations.