The 990-PF: How To Reap Savings and Avoid Pitfalls (LI)


Know the Opportunities and Risks


Failing to Properly Calculate Excess Grant Carryover For any year in which a foundation grants signifi- cantlymore than its MDR, the excess grants may be “banked” as grant carryover to help satisfy a future year’s MDR. The carryovers expire if not applied toward the foundation’s MDR within five years. When preparers calculate and apply carryovers incorrectly, the damage isn’t limited to a lost opportunity . Miscalculations actually place the foundation’s true MDR in doubt and create the false and dangerous impression that the foundation has satisfied its MDR when it has not. Correction may require filing several years’ worth of amended returns. COMMON PITFALLS The 990-PF is a potential minefield for the unwary or inexperienced tax preparer. Here are just a few of the most common mistakes: There are several general errors commonlymade by preparers. First, there are often inaccuracies reflecting assets on the balance sheet. In addition, the capital gain or loss on the sale of a donated asset is often improperly calculated due to a failure to apply the donor’s carryover basis. Finally, many returns are submitted without mandatory attachments or schedules. These errors can cause confusion for an IRS reviewer or a miscalculation of the excise tax due, leading to additional penalties. Calculating the MDR Incorrectly Often, return preparers miscalculate the MDR, arriving at a figure much lower than the actual amount. If a foundation fails tomeet its MDR in a given year, it will be required to file a penalty return, Form4720, and will be subject to a 30% penalty on the shortfall amount. Moreover, if the penalty is Failing to Fully and Properly Complete the Form

ver the years, we have examined thou- sands of tax returns of private foundations, filed before becoming Foundation Source

clients. What we have found is that many tax practitioners are unfamiliar with the nuances of the form, which is highly specialized. They thereforemay miss important opportunities for the foundation and unknowingly subject the foundations to scrutiny. MISSED OPPORTUNITIES FOR SAVINGS Not Counting Administrative Expenses Some preparers are under the misconception that only grants will satisfy a foundation’s minimum distribution requirement (MDR). In fact, legitimate administrative expenses count toward the satisfac- tion of the MDR, and not counting them can cause a foundation to scramble, making hasty grants (and perhaps wasting funds) in order to avoid a shortfall penalty. A better understanding of qualifying expenses can maximize the funds available for planned, strategic grantmaking. Not Using Investment-Related Expenses to Offset Investment Income Frequently, return preparers fail to apply invest- ment-related expenses to offset the investment income, resulting in a higher tax bill for the foundation. Failing to determine eligibility for the reduced 1% tax rate After its formation year, a foundationmay qualify to cut its excise tax liability in half, provided certain conditions are met. There is a section on the foundation’s tax return where calculations are made to determine whether the foundation has met these conditions. However, preparers often fail to complete this part of the return altogether! (For more information on this topic, read Lowering Foundation Excise Taxes .)

Not counting legitimate administrative expenses toward the MDR can cause the foundation to scramble unnecessarily.

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