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June 22, 2015 / Ciara Myers, Editor

Two things you really (really!) need to know about foundation excise tax rules (even if you’re not a finance officer)

by Katy Moore
Director of Corporate Strategy
Washington Regional Association of Grantmakers

Have you ever finished checking out at the grocery store only to realize that you accidentally swiped your foundation credit card? This might be a bigger deal than you think, even if you immediately pay the foundation back.

Private foundations are held accountable to a strict set of rules and regulations, and can incur costly penalties for breaking these rules. In last week’s Foundation Finance Affinity Group meeting, Andrew Schulz, General Counsel for Arabella Advisors, reviewed a number of useful tips for navigating private foundation excise tax rules. There were two specific topics that surprised many attendees:

Credit cards:  Did you know that if a foundation trustee, staff member, or other disqualified person accidentally uses his or her foundation credit card to pay for a personal expense it’s considered self-dealing? The IRS considers this a loan/extension of credit to a disqualified person and is, therefore, subject to excise tax penalties. Even if that person quickly remedies the situation by paying back the amount, technically it must still be reported as self-dealing and a 10 percent penalty applies. If the situation is not corrected, the penalties go up to 200 percent. Yikes. (NOTE: These penalties are the responsibility of the individual involved NOT the foundation. Also, since figuring out what disclosure is required and what penalty is owed can be complex, be sure to consult with your tax advisor if this has happened to you.)

Event sponsorships: These can be very tricky for private foundations, especially when the sponsorship includes tickets, a meal, or other tangible benefits. For example, let’s say your foundation sponsors a gala table for $10,000 and receives 10 tickets in return. In addition to attending the event, each person gets a meal valued at $100. Foundation staff and trustees who have a reason to be present at the gala for foundation purposes may attend. However, those staff and/or trustees may NOT bring their spouses, family members, or other disqualified persons as guests.  IRS rules clearly state that disqualified persons may not receive goods or services from the foundation or as a result of the foundation’s investments or activities. In this scenario, the disqualified person (i.e. the spouse or other guest) would receive a $100 meal benefit and would, therefore, be subject to excise tax penalties.

These are just two examples of complicated IRS excise tax rules that have everyday implications. For more information about how to avoid costly excise tax penalties, contact your tax advisor.

This event was the second in a three-part series for WRAG’s newest affinity group: foundation finance officers. The last installment in the series is scheduled for October 8 and will focus on Calculating the 5% Distribution. For more information about the group or to register for the next event, please contact Katy Moore.

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