From the moment you become a Foundation Source client, our private foundation tax experts are at your service. Whether it’s filing Form 1023, a private foundation’s first introduction to the IRS, or proactively identifying opportunities for tax savings, they do far more than prepare your annual tax return. In fact, their efforts can enable more of your funds to go to charitable works, helping your foundation achieve even more impact.

Here’s a brief introduction to our services:

Preparing and Filing Form 1023

This is a very important form because it is through this application that a private foundation requests recognition of its qualification as a tax-exempt organization. This form is also significant for a fledgling foundation because it will be subject to IRS scrutiny and, once completed and submitted, the foundation’s Form 1023 will be available as a matter of public record. Because Form 1023 is so important, it is imperative that it be completed accurately and carefully—a task that even seasoned advisors often choose to leave to private foundation specialists, such as the professionals of Foundation Source who have filed more than 1,000 successful 1023 applications over nearly two decades.

The 1023 explains how the foundation is going to operate; what kinds of expenses it is going to have; what assets it will hold; and what charitable activities it will undertake.  The foundation is required to attach the foundation’s charter documents to the 1023 because in order to be a charitable organization, not only do you have to file with the IRS to be recognized, but there are certain threshold requirements that every charitable organization must satisfy. The IRS asks for charter documents to see if they contain certain required provisions that must be “baked in” to these documents, such as the requirement that the organization will be run exclusively for charitable purposes.

Preparing Form 990-PF and Other Filings

The foundation’s annual tax return, Form 990-PF, can be a minefield for unwary preparers. Over the years, we have examined thousands of tax returns of private foundations that were filed before they became Foundation Source clients. Many tax practitioners are unfamiliar with the nuances of the form, which is highly specialized, and therefore miss important tax-savings opportunities for the foundation, or miscalculate the foundation’s progress toward fulfilling its payout requirement, or unknowingly subject the foundation to unwarranted scrutiny.

Our foundation tax experts can help you steer clear of trouble with properly prepared 990-PF tax returns. They complete more than 1,400 foundation returns each year.

Quarterly estimated excise taxes: As tax-exempt organizations, foundations do not ordinarily pay income tax. However, they do pay excise taxes on their investment income and capital gains. When their tax liability is estimated to be $500 or more, they need to pay a nominal excise tax of 1 or 2% on their income and net capital gains. (This is typically a negligible sum. For example, a foundation with $10,000 of tax liability would pay $200 in excise tax at the 2% rate.) Foundation Source calculates and pays the foundation’s quarterly estimated taxes to avoid penalties. Also, with proactive tax planning expertise from Foundation Source, it may be possible to qualify for a reduced tax rate of 1% in select years. It’s just one of the ways we help our clients preserve more of their charitable capital.

Year-end Forms 1099 and 1042: Foundations are required to complete Form 1099 if they pay or reimburse outside professionals and independent contractors (Form 1042 for non-U.S. citizens doing business in the U.S.).  We monitor payments and reimbursements to outside professionals and independent contractors processed through Foundation Source, then prepare and distribute the completed 1099s and 1042s as applicable.

State filings: Foundations need to complete state tax returns and may be required to complete other filings, including franchise taxes and other registration requirements. We handle all filings required by the state in which the foundation is domiciled, as well as for other states where filings may be required, when requested by the foundation. (Additional fees may apply for multiple-state filings.)

Year-end substantiation receipts: Federal tax laws require that foundation donors receive written verification of their charitable donations at year-end. We send these letters on behalf of our foundation clients.

Resources:

The 990-PF: How to Reap Savings and Avoid Pitfalls

Form 1023: Proceed with Caution