Obligations and Limitations of a Private Charitable Foundations

Once a private charitable foundation has been approved by the IRS, certain requirements must be met under the IRC in order to continue to be deemed an exempt charitable organization:

1. Annual Excise Tax.
   A 2% tax is imposed annually on all investment income generated by the foundation. (Section 4940)


2. Self-Dealing
   A foundation is prohibited from self-dealing which usually involves entering into financial transactions with disqualified individuals such as members of the board, trustees, managers, substantial contributors to the foundation and family members. The IRS can impose a 5% excise tax on such transactions and up to 200% of the amount involved if the self-dealing is not corrected. (Section 4941)


3. Distribution of Income
   A foundation is required to distribute 5% of its investment assets in any given year. If this minimum distribution is not met, the IRS can impose an excise tax of up to 15% of the undistributed amount. (Section 4942)


4. Controlling Business Entities
   A private charitable foundation may not own more than a certain percentage of any business entity. The IRS can impose a 5% excise tax of the amount in excess of the minimum. (Section 4943)


5. Inconsistent Investments
   A foundation cannot invest in anything that may jeopardize its short and long term goals or otherwise jeopardize its charitable purpose. The IRS can impose a 5% excise tax of the amount of the investment plus an additional 5% exercise tax against the manager of the foundation. (Section 4944)


6. Prohibited Taxable Expenditures
   A private charitable foundation is prohibited from making certain expenditures towards political activities or influencing legislation. The IRS may impose a 10% tax of any such expenditures. (Section 4945)