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PKF O'Connor Davies Accountants and Advisors

Key Tax and Compliance Considerations for Private Foundation Year-End Readiness

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August 28, 2026

Home » Insights » Key Tax and Compliance Considerations for Private Foundation Year-End Readiness

By Anan Samara, EA, Partner, Gianna Macari, CPA, Director and David Smith, CPA, Director

Key Takeaways

  • Private foundations should review minimum distribution requirements, qualifying distributions and grant documentation before year-end to reduce excise tax exposure.
  • Investment portfolio reviews can identify federal excise tax, foreign reporting and unrelated business income tax obligations tied to complex investments.
  • Accurate Form 990-PF preparation requires timely review of governance records, compensation, contributor data, information returns and state filing requirements.

For private foundations, proper planning ahead of year-end can provide an opportunity to confirm that the foundation’s grantmaking, investment activity, governance records and tax reporting are aligned before year-end transactions and reporting deadlines compress the timeline.

Timely review can help a foundation identify unresolved payout obligations, address grant documentation requirements, anticipate tax and filing requirements of investment activity and assemble the information needed for an accurate Form 990-PF. The following considerations can help foundations have a more deliberate compliance and planning process rather than a year-end scramble.

Minimum Distribution Requirement and Qualifying Distributions

A private foundation that fails to pay out the minimum distributable amount in a timely manner is subject to a 30 percent excise tax under §4942 of the Internal Revenue Service (IRS) guidelines. To avoid this additional tax, a foundation should consider the following:

  • Ensure prior year undistributed income has been, or will be, distributed before year-end. If most grantmaking is performed at the end of the tax year, consider giving out more than the required amount and give sufficient time to write out the checks or process the grant wires. For wire payments to grantees, the foundation should confirm the wire instructions with a trusted individual at the grantee’s organization before making the transfer to ensure the proper bank information is verified and avoid any delays. We also recommend review of the latest bank reconciliations for any old checks that have not yet cleared the bank. If these checks are stale and become written off, the foundation may have a higher distribution requirement. Grant refunds received during the year would also increase the distribution requirement.

  • Consider contributing to a donor-advised fund (DAF) to meet minimum distribution requirements. This is permitted by the IRS; however, if a contribution is made to a DAF which the foundation or a disqualified person has advisory privileges over, the foundation should maintain supporting documentation and include the required explanation within its Form 990-PF.

  • Develop a plan to use excess distribution carryforward as this carryforward expires after a five-year period.

  • Review the allocation of operating and administrative expenses between net investment income and charitable expenditures. Most common administrative expenditures that can be considered charitable consist of employee salaries, legal, accounting, grant administration and other costs that help a foundation further its mission. By reviewing these allocations in conjunction with the IRS Federal Form 990-PF instructions, a foundation may determine that certain expenses can qualify as a charitable expense thereby assisting in meeting the mandatory distribution requirements.

  • For grants subject to expenditure responsibility (i.e., grants to other private foundations, non-charitable tax-exempt organizations, taxable corporations and certain grants to foreign organizations), ensure that expenditure responsibility requirements are met. Generally, an expenditure responsibility grant requires a pre-grant inquiry and a written, signed grant agreement containing certain requirements including reporting by grantee to grantor foundation. If the foundation is making equivalency determinations, make sure the written advice used meets requirements.

  • For grants to individuals, confirm whether the foundation’s grant procedures require advance IRS approval. Advance approval is generally required for grants to individuals for travel, study, or similar purposes, unless an exception applies. Prizes or awards recognizing past accomplishments generally do not require advance approval; however, they may be taxable to the recipient and reportable on Form 1099-MISC. Obtain Form W-9 information from recipients when needed to meet applicable information-reporting requirements.

Federal Excise Taxes

A foundation may be able to mitigate its tax liability using some of these strategies:

  • Consider offsetting capital gains with capital losses. Capital losses from the sale or disposition of investments can reduce capital gains recognized in the current year. However, losses cannot go below zero and cannot be carried back or forward to another tax year.

  • Avoid the federal excise tax by donating highly appreciated publicly traded stock with a low-cost basis to a public charity grantee. The fair value of the appreciated securities counts toward the calculation of the five percent minimum distribution, and the payment of excise tax on the gain of the appreciated securities is avoided.

  • If the estimated excise tax for the current tax year is $500 or greater, estimated tax payments are required. These estimated tax payments are due the 15th day of the 5th, 6th, 9th and 12th months of the foundation’s fiscal year. At this point, the foundation most likely already made two or three tax deposits for the current tax year via the Electronic Federal Tax Payment System® (EFTPS).  Please note that the IRS now allows private foundations to make federal estimated tax payments directly through IRS Direct Pay, without enrolling in EFTPS. EFTPS remains available and may be preferable for foundations that make frequent payments, but Direct Pay provides a convenient no-registration option for one-time or occasional estimated tax payments.

Review Investment Portfolio

A foundation should review any changes in the composition of its investment portfolio to address and plan any new potential compliance and filing requirements. For instance:

  • Investments in limited partnerships and offshore funds should be reviewed to determine if any foreign filings are required. Foreign investments, transfers and changes in ownership may create specialized reporting obligations such as Forms 926, 8865 and 5471. It is recommended to have your tax advisor review these transactions promptly to determine the applicable filing requirements.

  • Review the foundation’s investment ownership interest and percentage in corporations and limited partnerships. Further disclosures may be required; for example, if the foundation owns over 50 percent of another entity. Certain ownership percentages of foreign corporations may trigger a filing mentioned in the bullet above.

  • Any person or entity (including individuals, corporations, partnerships, trusts and estates) having a financial interest, signature or other authority over bank accounts, securities or other financial accounts (having an aggregate value exceeding $10,000 at any time during the year) outside the U.S. must report such a relationship. Filing requirements also apply to taxpayers that have direct or indirect control over a foreign or domestic entity with foreign financial accounts, even if the taxpayer does not have foreign account(s). Failure to disclose the required information to the U.S. Department of the Treasury may result in substantial civil and/or criminal penalties.

  • Review all investments in limited partnerships to see if the foundation is subject to unrelated business income tax (UBIT) which is taxed at corporate or trust rates. Also, review tax exposure to states in which the foundation would not normally be required to file.

  • If a foundation has unrelated business income (UBI), consider utilizing the charitable contributions deduction on Form 990T. There may be income shown on line 1 of Schedule K-1, which is ordinary income from trade or business, yet UBI may not be indicated on Schedule K-1 or its statements. In analyzing its UBI-generating investments, the foundation should identify separate trades or businesses and analyze potential exposure to UBIT under the new siloing rules.

Other Points to Remember

A few other helpful reminders for this time of year include:

  • Form 990-PF must be filed electronically. Foundations should begin compiling the information and supporting schedules needed for the return well before the filing deadline to allow sufficient time to address incomplete records, complex investment reporting and required attachments.

  • Foundations that have paid directors, officers and/or management should consider having a compensation study performed by an independent consultant every few years to provide a reasonable basis for the compensation being provided.

  • Update, if necessary, the top-five highest paid employees and list of foundation officers to ensure their average hours per week devoted to their position is accurate for the current tax year.

  • Individuals who donate to private foundations must be provided with a proper acknowledgment letter for the individual to receive a charitable deduction on their federal tax return in accordance with IRS Publication 526. This is the responsibility of the private foundation and should be done in a timely manner.

  • 1099-NEC tax forms are required to be issued for payments of at least $2,000 to certain professionals including accountants, attorneys and other independent contractors. The foundation should have W-9 forms on file for vendors, which include payee addresses and tax identification numbers for ease of filing these forms by their due date which is generally January 31.

  • Foundations must monitor contributors who generally contribute individually more than $5,000 to the foundation and whose contributions exceed two percent of the foundation’s total contributions received since creation through year-end. To ensure transparency, the foundation needs to maintain accurate records for all contributions and track potential substantial contributors separately.

  • Review prior year’s filings, especially the state filings (if any). Each individual state may have a different time frame as to when a filing is required; therefore, the time for filing state reports may differ from the time for filing the 990-PF tax return.

  • If there were amendments to the foundation’s governing documents not yet reported to the IRS, i.e., bylaws, articles of incorporation, etc. during the year, notify the tax preparer as a conformed copy is required to be attached to the foundation’s filed 990-PF.

  • Review transactions involving disqualified persons along with our self-dealing bulletin to determine whether there will be any Form 4720 exposure. This is important to bring to the tax preparers attention in advance of the filing deadline, as 4720 forms are due on the 15th day of the fifth month after year-end.

Looking Ahead

The time spent planning and utilizing any combination of these tips could prove to save the foundation considerable resources depending on its current financial position and year-to-date activities. Considering them now also allows for sufficient time to utilize any of these strategies and coordinate with trusted advisors to execute them in a timely manner, efficiently and correctly.

Contact Us

We welcome the opportunity to answer any questions you may have related to this topic or any other accounting, audit, tax or advisory matters relative to private foundations. Please call 212.286.2600 or email any of the Private Foundation Services team members below:

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