How to File for Tax-Exempt Status for Your Foundation

When creating a non-operating charitable foundation, it is essential that you establish the foundation’s tax-exempt status. The IRS must officially recognize your foundation as a qualified charity before you can take charitable deductions for the gifts you make to this foundation. Obtaining tax-exemption can be difficult, but without it you may as well not have a foundation. You must also file an annual excise tax return for the foundation.

To obtain tax-exempt status, file Form 1023, Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. Expect that your application will be rejected at least once. The IRS will give you explicit reasons why it has rejected your application. Fix the problematic sections and resend it.

You will also have to file an annual Form 990-PF, Return of Private Foundation. Don’t wait until you’ve received your determination letter from the IRS before you begin filing this form. Work on the assumption that you’ll eventually receive your exemption. Form 990-PF is an excise tax return, not an income tax return. You’ll be required to pay one or two percent of your net income as excise tax.

Unlike most other types of trusts, non-operating charitable foundations (also called family foundations) are allowed to use a fiscal year-end, where the tax year ends on the last day of any month, for tax reporting purposes. If you choose a fiscal year-end for your foundation, Form 990-PF is due four and one-half months after the end of the fiscal year.

Filling out Form 990-PF is extremely difficult. You probably won’t be able to prepare this return on your own, and neither will most accountants, attorneys, or enrolled agents. Do your homework and find a professional preparer to prepare these returns. Ask to see some evidence that the preparer can do this work. Form 990-PF is open to public inspection so you can see one that he or she has prepared.

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