Internal Revenue Code section 4940 imposes an excise tax of 2 percent on the net investment income of most domestic tax-exempt private foundations, including private operating foundations. Some exceptions apply. An exempt operating foundation is not subject to the tax. Further, the tax: is reduced to 1 percent in certain cases.
This tax must be reported on Form 990-PF, Return of Private Foundation. Payment of the tax is subject to estimated tax requirements. For more information concerning payment of estimated tax, see the Instructions for Form 990-PF. Nonexempt private foundations are also subject to this tax, but only to the extent that the sum of the 2 percent tax plus tax on unrelated business income, applied as if the foundation were tax-exempt, is greater than income tax liability for the year.
Example. A taxable private foundation had an income tax liability for 2002 of $10,000. If the foundation were tax exempt, it would have a $4,000 liability for tax on net investment income and a $7,000 liability for tax on unrelated business income. The foundation is liable under section 4940 for $1,000, the amount by which the sum of the tax on net investment income and the tax on unrelated business income ($11,000) exceeds the amount of income tax liability ($10,000).