Taxes on Failure to Distribute Income - Private Foundations


Private foundations are required to spend annually a certain amount of money or property for charitable purposes, including grants to other charitable organizations.  The amount that must be distributed annually is ascertained by computing the foundation’s distributable amount.  The distributable amount is equal to the foundation’s minimum investment return with certain adjustments.

The distributable amount must be distributed as qualifying distributions.  However, a foundation may set aside funds for up to 60 months for certain major projects. Excess qualifying distributions may be carried forward for a period of five tax years immediately following the tax year in which the excess was created.  Special transitional rules apply to foundations created before May 27, 1969.

A foundation that fails to pay out the distributable amount in a timely manner is subject to a 30 percent excise tax under section 4942 on the undistributed income.  The tax is charged for each year or partial year that the deficiency remains uncorrected.  An additional 100 percent tax is triggered if the foundation fails to make up the deficient distribution within 90 days of receiving notification from the IRS of its failure to make minimum distributions.

Limited exceptions to the tax may apply.

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