Tax on net investment income


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. 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).

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