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Excise Tax (IRC Section 4940)

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Excise Tax (IRC Section 4940)

A private foundation is subject to an annual excise tax equivalent to 2% of its net investment income. This can be reduced to 1% of net investment income if its qualified distributions meet certain requirements. Effective for tax years starting after December 20, 2019, this excise tax has been changed to a flat 1.39% rate.

The tax is calculated and paid annually along with the foundation's filing of IRS Form 990-PF. If the excise tax is expected to be greater than $500, then the foundation will need to make estimated quarterly tax payments. Calculations for the estimated tax payments can be made using IRS Form 990-W and paid through the Electronic Federal Tax Payment System (EFTPS), www.eftps.gov.

Note: Some private operating foundations are not subject to this tax. Refer to the IRS definition of an exempt operating foundation for details.

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