private operating foundation income test

[tax1111]

Can anyone help illustrate how the income test of Private operating foundation work?
As per IRS: "A private operating foundation is any private foundation that spends at least 85 percent of its adjusted net income or its minimum investment return, whichever is less, directly for the active conduct of its exempt activities (the income test)."

say, for tax year 2020, the foundation's minimum investment income is $80; adj. net income is $100 (gross income is $300, deductions are $200). 85% of the less of the two is $68.

What is the exempt activities' spending in this case? Is it $200 deductions? If so, since $200 is more than $68, the foundation passed the income test?

Any help will be greatly appreciated!

[Lee B]

Since I had never heard of this kind of entity, I did a little bit on online self education.

What I found out was that these entities are somewhat rare and a bit unusual.

Since you asking what appears to be a fairly basic question, that suggests that these entities may not in your area of expertise.

I have learned in recent years to stick to my areas of expertise.

[tax1111]

Thank you for quick response and your advice! 

[DANRVAN]

22 hours ago, tax1111 said:

What is the exempt activities' spending in this case?

You did not provide enough information. 

 

22 hours ago, tax1111 said:

directly for the active conduct of its exempt activities

Which means money spent for the charitable purpose it was setup for.  That includes admin cost related to the charitable activities of the organization.

 

[DANRVAN]

Just got done working with a local scholarship organization that had been self reporting on 990 when if fact they are a Private Foundation, so switched over to 990-PF.   Also explained to them that they are a nonoperating instead of an operating PF.

[tax1111]

2 hours ago, DANRVAN said:

Just got done working with a local scholarship organization that had been self reporting on 990 when if fact they are a Private Foundation, so switched over to 990-PF.   Also explained to them that they are a nonoperating instead of an operating PF.

Thank you for the information. Besides 5% minimum required distribution for nonoperating foundation, excise tax for net investment income for both operating and nonoperating foundations, are there other areas a private foundation needs to pay attention to so as to maintain its exempt status?

Thank you!

[Lion EA]

https://www.irs.gov/charities-non-profits/charitable-organizations/private-foundations is a starting point and should reference more authoritative sources.

 

[DANRVAN]

On 10/7/2021 at 11:57 AM, tax1111 said:

Thank you for the information. Besides 5% minimum required distribution for nonoperating foundation, excise tax for net investment income for both operating and nonoperating foundations, are there other areas a private foundation needs to pay attention to so as to maintain its exempt status?

The 30% tax can be a big hit so it is important to make the required distribution.

They have 12 months after the end of the tax year to make the distribution.

Excess distributions can be carried forward.

You need to value any investments at fmv for the 5% rule.

Subject to UBIT and self dealing rules.

And of course important to determine if they are actually a PFD vs public charity.

Sounds like you are getting it down.

Is this a new organization you are dealing with?