As 2016 comes to a close, it is important to set aside time in the midst of holiday preparations and planning for the New Year to ensure you have taken care of your private foundation. Here are a few key things to think about with respect to your foundation as the end of the year draws near.
First, have you made your required minimum distributions? Private non-operating foundations are required to distribute approximately 5% of the fair market value of their assets for exempt purposes every year. Failing to do so will result in an excise tax of 30% of the amount under-distributed, and will not allow the Foundation to take advantage of the 1% reduced tax rate for the next 5 years. If you are unsure if the foundation has required distributions remaining to make, review your most recently filed Form 990-PF and compare the amount of undistributed income calculated in Part XIII to the distributions that have already been paid in the current year. Be sure to make any remaining distributions by the end of the year.
Next consider if it is worth the effort to estimate the amount of distributions needed to qualify for the reduced tax rate of 1% vs the standard 2% tax rate. With a good projection of the average fair market value of your assets during the year, you can determine the level of distributions necessary to qualify for the 1% tax rate. This could allow you to distribute more money for your exempt purpose and take advantage of a reduction in taxes, thus leaving more money for the future.
Finally, review your net investment income so you will not have any surprises at year-end. Look especially at your capital gains/losses. Private foundations are unique in that capital losses can only be used to offset capital gains and are not allowed to be carried forward or back to other years. If you find that you have a net capital loss consider taking advantage of this loss by selling appreciated property. After determining if you will qualify for the 1% or 2% tax rate and looking at your total investment income, review the estimated quarterly payments you have made for the year. Use this time to adjust the final quarter payment if necessary in order to avoid underpayment penalties.
Taking a few minutes during this already busy time to do some year-end reviews can ensure a penalty free and happy new year!