A version of this article was previously in Exponent Philanthropy in February 2022.

Every year, IRS Form 990-PFs are filed with inaccuracies and mistakes that can be costly to a foundation’s wallet and reputation. Private foundations that don’t have the in-house technology to meet this requirement may seek assistance from tax advisors to avoid these errors.

One such example is that starting with the 2020 tax year, Form 990-PF must be filed electronically. Foundations that submitted a paper filing have already or will receive a notice from the IRS for incomplete filing of their 2020 Form 990-PF because they didn’t meet the electronic-filing requirement.

May 15 Deadline for Electronic Filing

Now that the 2021 Form 990-PF and instructions have been released by the IRS—including the continued requirement to file electronically—many private foundations have shifted focus to filings for the 2021 tax year and are already either working with their tax advisor or preparing this annual filing on their own as the May 15 deadline approaches.

This begs the question: Where should a private foundation focus when preparing or reviewing its Form 990-PF?

Form 990-PF Focus Areas

Part I, Analysis of Revenue and Expenses

• Is the foundation a cash or accrual basis taxpayer? If it has audited financial statements each year, accrual is likely the better choice for consistency—but that could involve an accounting method change.
• Has the foundation accurately reflected direct investment expenses against investment income and a reasonable allocation of indirect expenses?
• Are disbursements for charitable purposes reported on the cash basis only, which is required for column D?

Parts II & III, Balance Sheets & Analysis of Changes in Net Assets or Fund Balances

• Has the breakout of investments by type been presented correctly and detailed out by investment in the appropriate supplemental statement?
• Have unrealized gains and losses been presented as other increases or decreases rather than in investment income?

Part VI-A, Statements Regarding Activities

• Has the foundation properly responded regarding any attempts to influence any national, state, or local legislation, political activities, or new activities the foundation hadn’t previously engaged in?
• Did the foundation generate unrelated business gross income of $1,000 or more and is therefore filing a Form 990-T?
• Did the foundation make changes, not previously reported to the IRS, to its governing documents?

Several of these questions are answered with a yes or no, but they require a foundation to provide further explanation in a supplemental statement.

Part VI-B, Statements Regarding Activities for Which Form 4720 May Be Required

• Did the foundation conduct transactions with its founder, board members, officers, substantial contributors, or family members or the controlled entities of any of these individuals? Consider sales, property leases, borrowing, furnishing goods or services, and professional services or expense reimbursements.
• Did the foundation provide grants to individuals, non-charitable organizations, or for purposes other than religious, charitable, scientific, literary, or educational? Think about scholarships to individuals for travel, study, or other similar purposes; grants to foreign organizations; or program-related investments involving a for-profit entity.

Many of these activities may be subject to correction, payment of an excise tax by the disqualified person, and reporting on a Form 4720.  Careful thought will want to be given to the activities of the foundation for future purposes and not only for the filing of the Form 990-PF.

Part IX, Minimum Investment Return

• Has the foundation used the correct method for averaging cash balances and a reasonable and consistent method for averaging the monthly fair market value of securities?
• Have all assets from Part II been included in the calculation that don’t have a direct correlation to charitable-use activities?

Private foundations that don’t include all non-charitable use assets or incorrectly calculate the fair market value are at a risk of reporting a lower minimum investment return than they actually have. This could cause undistributed income and an excise tax the foundation didn’t realize or intend.

We’re Here to Help

For help with preparing and filing your Form 990-PF, contact your Moss Adams professional.