2023 Private Foundation Tax Planning Guide

Private foundations need to plan for the future to navigate changing regulations and fluctuating markets. Throughout 2023, the industry shifted its focus from the COVID-19 pandemic to economic and political climates, bringing challenges and opportunities for foundations and their grantees. While inflation increased, the labor market remained strong, but the stock market had it lowest annual returns in nearly 15 years.

Overview of Topics

Private foundations should implement year-end tax strategies to prepare for 2024. Learn more about the following 2023 trends in the corresponding sections:

Electronic Filing

The Taxpayer First Act enacted on July 1, 2019, requires tax-exempt organizations to electronically file information returns and related forms. The law affects tax-exempt organizations in tax years beginning after July 1, 2019.

For private foundations, specifically Form 990-PF, Form 990-T, and Form 4720 must be filed electronically.

IRS Priorities and Accomplishments

Priorities for fiscal year (FY) 2024 align with the objectives of the IRS Strategic Operating Plan to address underreporting through expanded examinations and other actions. With respect to exempt organizations, these priorities include:

  • Better taxpayer experience
  • Faster issue resolution
  • Smarter enforcement
  • Advanced technology and analytics
  • Empowered employees

Increased focus on exams of high-income taxpayers with tax-exempt entity issues includes foundation tax filings pulled into examinations of estates and high-income individual tax return filings due to large charitable contribution deductions.

The IRS Tax-Exempt & Government Entities Division (TE/GE) published its FY 2022 accomplishments letter in spring of 2023. Some of its notable items include:

  • 3,425 exempt organizations examinations completed
  • 78% of these resulted in a tax change
  • 35% from a related examination
  • 53 revocations were proposed

Exam issues identified:

  • Unrelated business income
  • Excise taxes
  • Employment tax issues, including employee misclassification and taxable fringe benefits

The Inflation Reduction Act allocated roughly $80 billion to the IRS over the next 10 years, beginning 2023. The IRS indicated its FY 2023 program and priorities should do the following:

Enhance Taxpayer Services

This IRS noted promoting the use of taxpayer digital communications to taxpayers and representatives, increasing access to tax services throughout Indian Country and elsewhere.

Strengthen Compliance Activities

This includes employing the issue scoring model to develop issues submitted in the issue portal for potential compliance strategies. It also covers collaboration across the IRS on existing and emerging issues, including examinations of wealthy individuals and expansion of use of data, machine learning, and artificial intelligence algorithms to select returns for exam.

Develop the Workforce

Workforce development includes revising the Frontline Leadership Readiness Program (FLRP) training to include hands-on training early in the curriculum to set candidates up for success.

Transform Operations

This encompasses the deployment of electronic filing of additional returns filed by TE/GE taxpayers, including Forms 5227, 5330, and 8038-CP, as well as the launch of the new consolidated TE/GE Examination Internal Revenue Manual (IRM).

Initiative to Accelerate Charitable Giving

Proposed legislation, the Accelerating Charitable Efforts Act, includes a provision that most distributions by private foundations to donor-advised funds wouldn’t count against the 5% minimum distribution requirement—ending the ability of private foundations to meet the 5% distribution requirement by making a distribution to a donor-advised fund.

These two provisions continued to get attention in 2023 as part of President Biden’s Greenbook Proposal of FY 2024.

The proposed reforms would also eliminate the 1.39% annual net investment income excise tax for any year in which a private foundation pays out 7% or more of the fair market value of its assets or agrees to limit its life span to 25 years or less.

Disaster Relief Assistance

Many private foundations have explored ways to provide disaster-relief assistance to those in need as result of the COVID-19 pandemic—including individuals, for-profit businesses, governments, and foreign organizations. These payments could be eligible for treatment as a qualifying distribution.

Considerations regarding funding restrictions and private foundations include:

  • Assistance must be provided and used for a charitable purpose.
  • Assistance must be given to a charitable class. A charitable class must be large or indefinite, with a public benefit to assisting the charitable class.
  • If the disaster relief assistance doesn’t fall within the private foundation’s exempt purpose, the organization will need to notify the IRS.
  • Assistance may require expenditure responsibility reporting or an equivalency determination, so it isn’t considered a taxable expenditure.
  • Assistance may require preapproval from the IRS.
  • It’s important to document assistance programs, qualifications, and assessments of recipients.

Private foundations that wish to launch a disaster-relief assistance program should consult with their tax advisor.

COVID-19 Pandemic Relief and Assistance

Disruption from COVID-19 continues to strain individuals and organizations, including private foundations. However, legislation could provide private foundations or their grantees relief and assistance concerning tax credits. Some of the below opportunities may require filing amended returns and have deadlines affected by a statute of limitations.

Employee Retention Tax Credit (ERTC) for Employers

Under the ERTC in 2020, employers could obtain a credit of 50% for qualified compensation paid to employees, up to $10,000 for all quarters. The ERTC is refundable and applicable against other payroll taxes.

The Consolidated Appropriations Act of 2021 and the American Rescue Plan Act (ARPA) of 2021 extended the ERTC through June 30, 2021, and further to December 31, 2021. However, it was then terminated on September 30, 2021.

the IRS announced on September 14, 2023, that it would immediately stop processing ERTC claims to protect organizations from scams, but will continue to process those received before that date with a high level of scrutiny.

Disaster Relief Payments to Employees

Former President Donald Trump declared a national emergency on March 13, 2020, in response to COVID-19. Under Internal Revenue Code (IRC) Section 139, private foundations may provide assistance to employees and their families following the declaration of national emergency without the risk of incurring certain tax liability.

A foundation can make financial assistance payments provided certain safeguards are in place.

Inflation Reduction Act

The Inflation Reduction Act made significant changes to energy tax credits. For tax years beginning after December 31, 2022, and before January 1, 2033, tax-exempt entities may elect to treat certain tax credits as refundable payments of tax. The Inflation Reduction Act includes almost $400 billion in federal tax credits and other incentives meant to reduce carbon emissions and accelerate the transition from fossil fuels.

Exempt organizations may request tax refunds (new direct pay election) for any amount paid in excess of their tax liability for the following tax credits:

  • Section 30C: Alternative fuel vehicle refueling property
  • Section 45: Electricity produced from certain renewable resources for projects originally placed in service after December 31, 2022
  • Section 45Q: Credit for carbon oxide sequestration credit for projects originally placed in service after December 31, 2022
  • Section 45U: Zero-emission nuclear power production credit
  • Section 45V: Credit for production of clean hydrogen for projects originally placed in service after December 31, 2022
  • Section 45X: Advanced manufacturing production credit
  • Section 45Y: Clean electricity production credit
  • Section 45Z: Clean fuel production credit
  • Section 48: Energy credit (special phaseout rule for direct pay if domestic content requirement isn’t satisfied
  • Section 48C: Qualifying advanced energy project credit
  • Section 48E: Clean electricity investment credit (technology neutral)
  • Section 45W: Credit for qualified clean commercial vehicles

Transferability election allows other taxpayers to monetize credits more easily.

Secure ACT 2.0 Changes to 403(b) Plans

The Secure ACT 2.0 includes several provisions impacting retirement plans, with changes designed to standardize 403(b) plans with 401(k) plans. For example, for plan years beginning after December 31, 2023, Secure 2.0 modifies hardship withdrawal rules for 403(b) plans by aligning them with 401(k) rules.

This act also attempts to increase participation through expanding age limits, contribution limits, and allowing employers to offer de minimis incentives such as low-dollar gift cards. Secure 2.0 increases the required minimum distribution age from 72 to 73 starting on January 1, 2023, and 75 starting on January 1, 2033. Secure 2.0 expands the age for catchup contributions allowing individuals 50 and over to make additional contributions. Individuals with compensation in excess of $145,000 will be required to be made as a Roth contribution.

Conservation Easement Integrity Act

Effective for contributions made after December 29, 2022, this act codifies the 2016 tax shelter listing notice by disallowing a charitable deduction for a qualified conservation contribution if the deduction claimed exceeds two and a half times the sum of each partner’s relevant basis in the contributing partnership, unless the contribution meets a three-year holding period test. Substantially, all of the contributing partnership is owned by members of a family, or the contribution relates to the preservation of a certified historic structure.

In the case of a contribution for the preservation of a certified historic structure, a new reporting requirement applies. Taxpayers are now permitted to correct certain defects in easement deeds, except for easements involved in abusive transactions.

Legacy IRA Act

This act allows a once-in-a-lifetime $50,000 tax-free distribution from individual retirement accounts to split interest entities like charitable gift annuities and charitable remainder trusts, effective for tax years beginning after December 29, 2022. It’s useful for donors receiving required minimum distributions before they need the income for living expenses because it defers taxable income.

Flat Tax Rate

Private foundations can continue to plan for a flat tax rate on net investment income for now.

Effective for tax years beginning after December 20, 2019, the following changes apply:

  • IRC Section 4940(a) amended to provide a single tax rate of 1.39% on net investment income
  • IRC Section 4940(e) repealed

For tax years beginning after December 20, 2019, all private foundations subject to IRC Section 4940 excise tax on net investment income calculate the tax using the 1.39% rate.

Minimum Distribution Requirement

IRC Section 4942 imposes a minimum distribution requirement on nonoperating private foundations. Foundations that fail to meet this requirement must pay an excise tax.

Qualifying Distributions

The following expenses are qualifying distributions if they’re incurred while implementing a foundation’s charitable purpose:

  • Directly incurred expenses
  • Reasonable and necessary administrative expenses
  • Contributions, gifts, and grants paid to individuals and other organizations
  • Acquisition costs of assets used in a foundation’s charitable activities in the year the assets are acquired or converted to a tax-exempt use
  • Increases in program-related investments

Qualifying distributions are determined on the cash receipts and disbursements method of accounting, regardless of the accounting method used to maintain a foundation’s books and records.

These distributions must be made by the end of a foundation’s succeeding tax year. For example, if the undistributed requirement for 2022 was $500,000, qualifying distributions of $500,000 must be made by the end of the 2023 tax year.

Foundations should determine whether they met the minimum distribution requirement for prior years by the end of the 2023 tax year. If not, they should make final qualifying distributions before the last day of the tax year to avoid the excise tax.

Foundations may also want to consider incorporating the current- and future-year minimum distribution requirements into their planning strategies.

Excess Distributions

A foundation’s strategic plan can be invaluable, particularly when determining how to increase the use of any carryforwards.

A private foundation that distributed more than its minimum required distribution in a previous year could have an excess-distribution carryforward, which it must use within five years.

Capital Gains and Losses

To determine gross investment income, a foundation must add net capital gains to the net investment income used to calculate excise tax.

Capital losses from the sale or other disposition of investment property can reduce capital gains recognized during a tax year. However, these losses can’t go below zero for a private foundation, regardless of whether it’s set up as a corporation or trust.

This means that if capital losses exceed capital gains in a tax year, the excess might not offset gross-investment income in that year. The excess can’t be carried back or forward to offset gains in prior or future tax years either.

A foundation can review its portfolio to determine if it’s beneficial to trigger capital gains before the end of the year. This can help a foundation offset excess capital losses and avoid losing their benefit.

Depending on circumstances, a foundation could repurchase the sold assets or buy replacement investment assets. This would result in a stepped-up tax basis that would reduce the future gain when the investment asset is eventually sold. Alternatively, a foundation may want to trigger losses to offset capital gains.

Privately Held Stock and Highly Appreciated Property

With some exceptions, the rules limit how much donors may identify for charitable deductions of certain privately held stock and highly appreciated property.

Donating property encumbered with debt may require a donor to pay a self-dealing tax, and a foundation is forbidden from entering into a sale or exchange with a disqualified person—even if the sale price is less than the fair-market value.

Liquidity Issues

A private foundation may face a liquidity dilemma if it holds a large amount of privately held stock or other non-income producing assets. If the organization holds these assets for investment, they’re included in the minimum required distribution calculation and may not produce sufficient income to satisfy the foundation’s annual payout requirements.

This issue should be considered prior to accepting gifts, and illiquid holdings should be reviewed annually for liquidity concerns.

Appreciated Asset Grants

A private foundation could consider granting an appreciated asset, such as a publicly traded security, to a public charity instead of selling the asset and granting cash, which would allow the foundation to avoid the excise tax on the security’s inherent capital gain while still making a grant equal to the asset’s fair-market value. This can be especially valuable because the donor’s basis in the appreciated asset is carried over to the foundation and could result in a substantially large gain.

Gift Acceptance Policy

A foundation should periodically review its gift acceptance policy to verify it covers illiquid gifts and unusual donations.

This preparation can help address donors who propose these types of gifts, especially at year-end.


The IRS stated that virtual currency is property for tax purposes. However, since there’s no valid charitable deduction without a contemporaneous written acknowledgement, the major issue is likely to be valuation.

IRC Section 170(f)(11)(E)(ii)(I) criteria for a valid deduction requires that the individual have verifiable education and experience in valuing the type of property for which the appraisal is performed.

A foundation should seek assistance when determining its potential income-tax liabilities, filing requirements, and estimated income-tax payments that it needs to make before year-end.

Alternative Investments

A foundation with alternative investments generally receives a Schedule K-1 each year. This form provides necessary information for tax compliance and planning needs.

Alternative investments can generate any of the following:

  • Unrelated business income that organizations need to report on Form 990-T
  • Sate-tax liabilities or filing requirements
  • One or more foreign disclosure filings, such as Forms 5471, 926, 8938, 8865, or 8621

A foundation should seek assistance when determining its potential income-tax liabilities, filing requirements, and estimated income-tax payments that it needs to make before year-end.

Unrelated Business Taxable Income

Under prior tax law, a foundation paid tax on the net of all taxable unrelated business income (UBI) activities at either the corporate or trust income tax rates, depending on the structure of the foundation.

However, final tax reform legislation enacted in 2017 requires each unrelated trade or business activity be reported separately, rather than netted with tax paid on the profitable activities.

This means a foundation needs to track UBI activities separately and track NOLs by activity rather than in total.

IRS published final regulations effective December 2, 2020. The regulations build on the prior guidance released in IRS Notice 2018-67 but also simplify and clarify some areas. The final regulations allow private foundations to categorize UBI activities based on the first two digits of the National Association of Insurance Commissioners code only, which designate the sector of a trade or business.

Qualified Partnership Interests

The IRS’s final regulations permit a foundation to aggregate its unrelated business taxable income (UBTI) from all qualified partnership interests (QPIs)—including those that lower-tier partnerships conduct—if the foundation meets the de minimis or significant participation tests or it held the partnership interest as of August 21, 2018. As a reminder the transition period ended on the first day of the first tax year beginning after December 2, 2020.

De Minimis Test

A foundation meets this test if it directly holds no more than 2% of the profits and no more than 2% capital interest in a partnership. The proposed regulations simplified this test.

Significant Participation Test

A foundation meets this test if its controlled entities, or related supporting organizations, directly hold no more than 20% of the capital interest and don’t have control or influence over the partnership.

Income from debt-financed property is also considered an investment activity and can be aggregated with qualifying partnership and S corporation investments.

S corp interests that don’t meet the de minimis or significant participation tests are treated as separate activities. A foundation can’t group this income with income from other activities, even if the activities are the same.

Corporate Tax Structure

Tax reform in 2017 created a simplified corporate tax-rate structure, lowering it to a flat 21% tax rate for all corporations and lowering the tax-rate brackets for trusts. Foundations that generate UBTI may stand to benefit from this change.


Consider leveraging NOLs to reduce your tax burden.

Tax Reform

The 2017 tax reform law affected NOLs in several ways:

  • The carryforward period is indefinite rather than limited to 20 years.
  • The opportunity to carryback losses has been removed for those losses generated in years starting after December 31, 2017.
  • New losses generated are limited to offsetting taxable income in a given year to 80% of taxable income rather than 100%. These losses can apply only to offset taxable income from the trade or business that generated the NOL.

Losses generated before January 1, 2018, can offset 100% of taxable income from any source, including qualified transportation and parking benefits, until exhausted.

International Regulations

The US Department of the Treasury and the IRS issued final regulations for global intangible low-taxed income (GILTI), which taxes US shareholders and controlled foreign corporations (CFCs) on their share of intangible income if that income was subject to a low local tax rate.

For reporting purposes, GILTI is considered a deemed dividend and therefore generally excluded from UBTI. However, even if the inclusion isn’t UBTI and doesn’t create an income tax liability, additional international filings may be required—such as Form 5471—for taxable years after December 31, 2017.

For private foundations, the deemed dividend created by the GILTI inclusion is subject to net-investment income tax.

Bipartisan Budget Act

The Bipartisan Budget Act of 2018 became law on February 9, 2018. This act includes an exception, known as the Newman’s Own exception, to the excess business holdings rule that the tax on excess business holdings of a private foundation doesn’t apply to independently operated, philanthropic business holdings after December 31, 2017.

Generally, this exclusion must meet three criteria to qualify:

  • Foundation owns 100% of the voting stock at all times throughout the year, and the foundation acquired it by means other than purchasing
  • All profits go to charity
  • Foundation is an independent operation in terms of board, employee, or trustee positions

Operating Status

Different operating statuses affect donor deductibility and how a private foundation meets annual payout or spending requirements.

Private Operating Foundation Status

Similar to public charities, private operating foundations provide better tax treatment for donors than private foundations and aren’t subject to the minimum required distribution.

If a foundation directly conducts charitable activities, it should evaluate whether it qualifies as a private operating foundation.

Operating status require two annual tests, an income test as well as one of the following alternative tests:

  • Asset
  • Endowment
  • Support

A foundation must meet both tests in three of the four most recent tax years or in the aggregate over those four years. Private foundations seeking to qualify as a private operating foundation should project if they’ll pass the tests and determine if they need to take any steps before or after year-end.

Conversion to a Public Charity

Public charities provide a more favorable charitable contribution deduction threshold. Unlike private foundations, they aren’t prohibited from engaging in certain activities with disqualified persons.

A foundation should consider converting to a public charity if it finds itself:

  • Consistently receiving contributions from multiple donors—not only the founding individual or corporation
  • Holding fundraising events
  • Meeting the support test as an operating foundation

Conduit Foundation Status

A private foundation qualifies as a conduit foundation for the purpose of donor-deduction limits if it makes qualifying distributions within two and a half months of tax year-end equal to 100% of the contributions received in that same year.

Once a private foundation qualifies as a conduit foundation, its donors can adhere to the adjusted gross income limitation of 60% imposed on cash contributions to public charities—effective for tax years beginning in 2022—rather than the 30% limit for private foundation contributions.

The requirements for treatment as a conduit foundation must be met on an annual basis, and the foundation must have no undistributed income remaining for the tax year in which the status applies.


After the June 2023 US Supreme Court’s landmark decision that rejected affirmative action at colleges and universities around the nation, scrutiny of diversity programs has increased. The court held that the race-conscious admission programs at Harvard and the University of North Carolina violated the Equal Protection Clause, and by extension, Title VI, because their practices of considering race when making college admissions decisions weren’t narrowly tailored to serve a compelling interest.

Looking Forward

Private foundations may seek help to address tax compliance, mitigate consulting issues, and benefit from regulation developments. For example, important resources like a planning analysis can help your private foundation forecast up to 20 years into the future to plan for your minimum distribution requirements.

Planning Analysis Benefits

A planning analysis can help your foundation:

  • Gain insight into necessary actions your foundation can take—based on its specific goals—to meet payout requirements and comply with applicable regulations
  • Run minimum distribution requirement estimates based on a variety of selection criteria, such as investment-return rates or large contributions to the foundation

This analysis can provide a full view of your foundation’s minimum distribution requirements environment, helping you better manage your distributions as your investment and donor mix evolves. It can also help you navigate the challenges of investing your foundation’s assets.

We’re Here to Help

To learn more about how this information may apply to your foundation or for help creating a strategy, contact your Moss Adams professional.

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