Changes to the 2020 Form 990-PF

As calendar year Forms 990-PF, there are a few changes to be aware of.

Reduced tax on net investment income repealed.

The Taxpayer Certainty and Disaster Tax Relief Act reduced the IRC Sec. 4940(a) excise tax on net investment income of private foundations from 2% to 1.39%. The legislation also repealed IRC Sec. 4940(e), Reduced Tax on Net Investment Income, eliminating the 1% tax bracket altogether. The new flat rate simplifies reporting for private foundations by eliminating Part V and Lines 5 and 6 of Part XII of the Form 990-PF.  All sections of the return that refer to the reduced rate and its calculation have either been removed or have an indication that the reduced tax on net investment has been repealed.

The dual rate had served as an incentive to private foundations to pay out more in qualifying charitable distributions in order to qualify for the reduced tax rate. While the new legislation made the tax calculation simpler, private foundations must continue to monitor their charitable disbursements to ensure that their minimum 5% charitable distribution requirement is met. Private foundations that do not meet their required distributions are subject to an excise tax of 30% on undistributed amounts.

Required electronic filing by exempt organizations.

For tax years beginning on or after July 2, 2019, the Taxpayer First Act requires that returns by exempt organizations be filed electronically. Accordingly, returns for all 2020 calendar year private foundations must be filed electronically.

Form 990 and 990-PF filings for tax years ending on or before June 30, 2020, may still be on paper. For the tax years that e-filing is required, there are some to be paper filed.  In the case of a short tax year, an exempt application pending, a name change or certain other circumstances detailed in the 990 or 990-PF Instructions, the IRS will continue to accept paper filing. The IRS may also waive the requirements to file electronically in cases of undue hardship. Information on filing a waiver for undue hardship is detailed in Notice 2010-13, 2010-4 I.R.B. 327. The Service will approve or deny requests for a waiver of the electronic filing requirement based on each filer’s particular facts and circumstances.

Reporting PPP Loan Forgiveness.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) established the Paycheck Protection Program (PPP) to provide loans to small businesses as a direct incentive to keep their workers on the payroll. The loans are forgiven if all employee retention criteria are met and the funds are used for eligible expenses. The instructions for the 2020 Form 990-PF clarify that amounts of PPP loans that are forgiven may be reported on Part I, Line 1 as contributions from a governmental unit in the taxable year that the amounts are forgiven.

While the instructions for Form 990-PF instruct private foundations to report the loan forgiveness as a contribution in the taxable year that amounts are forgiven, there are two acceptable methods for accounting for the PPP funds under generally accepted accounting principles (“U.S. GAAP”) on their audited financial statements. Organizations can elect to either treat the funds as debt until the amounts are forgiven or as a conditional contribution even before the loan is forgiven if the organization can demonstrate that it incurred qualifying expenditures prior to its year-end and during the covered period of the PPP loan.  Under the second option, there could be a book-to-tax difference if the amount is treated as a contribution on the organization’s financial statements in a year before the amount is actually forgiven and reported on Form 990-PF as a contribution in a subsequent year when the loan is actually forgiven.

For the latest information about developments related to Form 990-PF and its instructions, such as legislation enacted after they were published, go to About Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation | Internal Revenue Service (irs.gov).