Taxable Expenditures (IRC Section 4945)
A private foundation will incur additional excise taxes if it makes taxable expenditures. Included in these types of taxable expenditures are the following:
- Attempting to influence legislation or carrying on propaganda (commonly referred to as "lobbying" - note that the IRS permits certain exceptions);
- Influencing the outcome of a public election or carrying on a voter registration drive (again, certain exceptions are allowed);
- The making of grants to individuals for travel, study or other similar purposes (nondiscriminatory and objective grants made using grant procedures pre-approved by the IRS can be considered non-taxable);
- Grants to organizations that are not federally recognized public charities (if the private foundation exercises expenditure responsibility or, in the case of a foreign charity, makes an equivalency determination, then this type of a grant can be considered non-taxable); and,
- Amounts expended for non-charitable purposes.
Aside from the exceptions listed above, other permitted expenditures include:
- Expenditures and reasonable expenses incurred when acquiring investments that generate income used for the exempt purposes of the foundation;
- Tax payments;
- Qualified distributions;
- Deductions allowed when determining the net investment income of the foundation;
- Reasonable expenditures incurred to evaluate, acquire, modify and sell program-related investments; and,
- Business expenses of the recipient of a program-related investment.
Amount of the tax:
- 20% of the amount expended is assessed on the foundation
- 5% of the amount expended (up to a maximum of $10,000 for a single expenditure) is assessed on a foundation manager if he or she "knowingly, willfully and without reasonable cause" agreed to the taxable expenditure
- An additional tax of 100% of the amount expended is assessed on the foundation if the expenditure is not corrected within the taxable period
- An additional tax of 50% of the amount expended (up to a maximum of $20,000 for a single expenditure) is assessed on a foundation manager if he or she refuses to agree to any part of the correction