Internal Revenue Code Section 4940 imposes an excise tax 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. For tax years beginning on or before Dec. 20, 2019, the excise tax is 2 percent of net investment income, but is reduced to 1 percent in certain cases. For tax years beginning after Dec. 20, 2019, the excise tax is 1.39% of net investment income, and there is no reduced 1 percent tax rate.
This tax must be reported on Form 990-PF, Return of Private Foundation (PDF). 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 (PDF). Nonexempt private foundations are also subject to this tax, but only to the extent that the sum of the excise 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).