Deduction Modifications - Income Test - Private Operating Foundation Status


In determining whether a foundation meets the income test for private operating foundation status, deductions generally are limited to ordinary and necessary expenses paid or incurred for the production or collection of gross income, or for the manage­ment, conservation, or maintenance of property held for the production of income. These ex­penses include the part of a private foundation’s operating expenses paid or incurred for the pro­duction or collection of gross income.  Operating expenses include compensation of officers, other salaries and wages of employees, interest, rent, and taxes.

When only part of the property is income producing or held for the production of income (and therefore subject to the tax on net investment income) and the remainder is used for exempt purposes, the al­lowable deductions must be divided between exempt and nonexempt uses.

If expenses for property used for exempt purposes are more than the income received from the property, the excess may not be de­ducted.

Allowances for straight line depreciation and depletion (other than percentage depletion) are deductible.  Use of the accelerated cost recovery system is not permitted.  Deductions will be allowed for ex­penses and interest paid or incurred to carry tax-exempt obligations.  However, no deduction will be allowed for amounts not paid or incurred for purposes described earlier.  For example, there will be no deduction for:

  1. Charitable contributions,
  2. Net operating losses, and
  3. The special deductions for corporations

Return to Life Cycle of a Private Foundation