Name: IRS Form 990-PF Annual Workshop: Key Insights and Common Mistakes to Avoid
Uploaded: 2025-06-25T18:16:05.169Z
Duration: 2 h 31 min 48 s
Description: IRS Form 990-PF Annual Workshop: Key Insights and Common Mistakes to Avoid

Transcript for "IRS Form 990-PF Annual Workshop: Key Insights and Common Mistakes to Avoid": Good morning, and welcome to our IRS form nine ninety p s annual workshop, key insights and common mistakes to avoid, hosted by PKF OConnor Davies. Before we get started, I'd like to go over a few housekeeping items so you know how to participate in today's call. We're pleased to offer live closed captioning throughout the webinar. To access the captions, please use the stream text link located in the chat section of your attendee panel. You will have the opportunity to submit text questions to today's presenters by clicking on the q and a tab on the right hand panel. You may send in your questions at any time during the webcast. We have a lot of material to cover, and as time permits, we'll make an effort to respond. If we cannot get to your questions, a response will be sent post event. We're excited to announce that this webinar is offering three CPE credits in tax. Polling questions will be launched in the polls tab on your right hand panel, which will appear once we launch the poll launch the polling question. You will need to respond to nine of the 10 questions launched today. CPE certificates will be issued within eight to ten days via email. A copy of the PowerPoint slides and a recording of today's webinar will be made available to you via email four business days post event. And as we near the end of this webinar, we do have a very short survey which will be prompted, and your response is greatly appreciated. At this time, I would like to introduce Anand Samara, partner with our private foundation practice with PCS O'Connor Davies. Anand? Good morning. Good morning, everyone. We wanna, of course, thank you all for joining us today for our annual nine ninety workshop. We are pretty excited to get started. We have close to 250 participants on today. And before, we start, a special thank you to our guest speaker today, Valerie Sussman. Valerie is legal counsel for philanthropy with Herwer and Associates. Valerie today will walk us through the legalities of self dealing and how they, are applied to private foundations. I would also like to thank our cosponsor for today's workshop, Philanthropy Massachusetts. And, of course, I'd like to introduce Alex McCray. Alex, is the VP of membership engagement with Philanthropy Massachusetts. Alex will just only spend a few minutes on Philanthropy Massachusetts and what they do for us. Alex? Thanks, Hernan. Hi, everyone, and, welcome to this morning's workshop. On behalf of the entire Philanthropy Massachusetts team, thank you. As Anand mentioned, I'm Alex McCray, and I serve as the VP of member engagement and strategic initiatives here at Philanthropy Massachusetts. Just wanna give a huge thanks to our partner and cohost, PKF OConnor Davies, for reaching out to us, for continuing to, be a really strong partner to us. As we know, this workshop comes at a really critical time as the entire sector, philanthropic sector in particular, faces proposed reforms and increased scrutiny. For those less familiar with us, Philanthropy, Massachusetts is a fifty five year old statewide membership five zero one c three organization comprised of about 160 funders of all types across the Commonwealth with different focus areas, roles, and identities, including philanthropic advisors, wealth managers, and individual donors. We're one of just a few organizations of our type across the entire country that have both funders and nonprofits as members. Annually, our more than 100 programming and events promote and foster individual, cohort based, and organizational learning. We allow space for connections and networking, and we build the skills of staff, boards, and trustees. We also provide resources and tools for both funders and nonprofits. Our mission simply is to promote the practice and expansion of effective and responsible philanthropy to improve the health and vitality of this region. For anyone interested in learning more about us, feel free to reach out to me. My contact information will be shared in the follow-up message. Again, thank you for joining us. And with that, I'll hand things back over to Anand. You you know, we're we're here today, obviously, to go through the nine ninety, detailed walk through of the and, of course, the mechanics of the But we thought just as important, to spend maybe ten to fifteen minutes to talk about the history of the September, the history of the excise tax, the history of the distribution requirements, but also current developments and some of the the legislation that we see out there, that will impact private foundations. So with that, I'll turn it over to Tom Blaney, to walk us through that. Tom is the partnership partner in charge of the product foundation practice here at PKF OConnor Davies. Tom? Oh, no. Thanks thanks very much. And I see we have a polling question maybe before I start. CPE calling question number one. If we could just answer that. Do you find the history of form nine ninety p f and private foundations interesting? Yes. Of course. Or I'm I can't even read this. It's so small or not. I am a private foundation history buff. Just give everybody about fifteen seconds to answer that. So and, again, as as folks are answering that, I'm gonna say, going through a nine ninety is not the sexiest thing to do, and I guess it's about a two, two and a half hour program. It's three CPE credits. So I give everybody credit for sitting through this for for for a couple hours. Okay. So maybe just before we get into the history, let me just take a few minutes and and talk what's going on in the private foundation world regarding maybe people might have heard the big beautiful bill act, that initially, I guess, May 21 was proposed in the house and then in the senate in the middle of middle of June. And just a little what's happening even be behind that. And I'm gonna use the word chatter a few times here. There there was a lot of chatter or rumors back in February, March, April that there were gonna be executive orders coming out that probably would affect directly private foundations. Rumors or chatter out there was that there was gonna be an executive order that any foundation that had over $500,000,000 in assets and took any type of federal funds such as an AID money or something could possibly, become a governmental entity. What would that mean? Basically, the board would change and the government would now run it. Fortunately, that we haven't heard that recently, but that was so called chatter back in in February and March. Other so called rumors or chatter that they would retain the foreign between the private foundations is there was gonna be some type of oversight in foundations that gave out foreign grants, maybe elimination of certain foreign grants. As we all know, gifting to universities, Harvard has been in the news a lot. And then also certain foundations that are very pro DEI, they could they could be possibly attacked. So all those executive orders, at least currently, somewhat again, the chatter has died, but then all of a sudden, May 21, the house comes out with this big beautiful bill act. And probably the week or so before that, there was all talk out there about how private foundations and universities were going to have a relatively large excise tax on the net investment income. Right now, as we probably know, foundations pay a 1.39% excise tax. And we were hearing all different rates from 15% to 18%, even 20%, which would be somewhat catastrophic to the private foundation arena. There was even talk at one time about increasing the 5% minimum distribution, possibly six or 7%. All that seemed to die out. And then probably just maybe a week before the May 21 actual bill itself coming out, we heard that there could be a a tiered tax. And, actually, the philanthropy roundtable in DC, it would through their sources were were the ones, at least from what I see, were most on top of that change. And then the tiered tax came out. What's the tiered tax? Basically, it it it it is there's let me take a step back. There's roughly a 149,000 private foundations today, and the overwhelming bulk of them, over a 100,000 or so of them, have assets of less than 50,000,000. So for those under the new tiered tax structure proposed by the house, the tax would remain at 1.39%. The next level was foundations that had between 50,000,000 and 250,000,000 in assets. That tax would double to 2.78. Then the the third level was foundations between 250,000,000 and 5,000,000,000. That would go up to a 5% excise tax. And then foundations that had over 5,000,000,000 would be a 10% excise tax on your net investment income. Just a little tidbit here, and I confirmed this without, friends at FoundationMark, John Sites over there. There's only 25, maybe 26, wasn't exactly sure if there was a new one, foundations today that have over 5,000,000,000 in assets. So when you look at that whole 140, 150,000 numb 150,000 numbers of private foundations today, a very small component, less than 1% have assets of over 5,000,000,000. Again, last data was 25. It could be up to 26, maybe even 27 now, where foundations have over that amount but have yet to file their their nine ninety Then what happens is the senate, comes out with their version on June 16. And, fortunately, that whole tiered tax, everything affecting private foundation was rescinded. There was no mention at all of that tax. Now what's what's happening behind the scenes? We're hearing through a few different sources that there are certain Republican senators in in the senate that were a little annoyed that there was no heads up that there was going to be this tax, on private foundations. And they were the ones along with certain associations of different, groups of foundations such as the Council on Foundations and the Philanthropy Roundtable, really lobby for that to be rescinded. So it was rescinded. It wasn't in the the senate version. However, I'm gonna use the word chatter again. There's a lot of chatter out there between certain representatives in the house reaching out to certain senators to try to put something back in. So we don't know what's gonna happen. Right now it's out, but there's always a possibility that that might pop in. At the end, we'll take some questions also on current developments on this. But we just wanted to take a step, and bring this to everybody's attention, I guess, before we get into the history of of the September So the history of the September and private foundations, where where actually how did it come about? And it really goes back to start started in in the early nineteen sixties, 1961, 1962. There was a representative a house representative out of Texas, a democrat named Wright Patten. And from the early sixties to the middle to almost to the late sixties, he really had it in the private foundations. He actually chaired in the early sixties a subcommittee on foundations looking into possible abuses on foundations. In particular, he targeted the Ford Foundation. And in different areas, different elements, and he brought politics into the in into the into the arena as well, saying foundations, which, again, back then, they were called endowments that do grant making, have some political pain to them. And he kept on bringing up how Bobby Kennedy staff, about six of them, after they left his staff, got a $139,000 in grants from the Ford Foundation to do certain, travel or probably non travel like activities. So he was very always behind the scenes trying to put in some type of oversight. So in in early February of nineteen sixty nine, the the start of the 1969 reform act, congress started having putting certain committees together. And he he was the one that was the most vocal on putting together a group that would go after private foundations and and and actually maybe establish them as a separate entity within the charitable sector. And then what ended up happening is is the Tax Reform Act of 1969 was actually signed just before the year ended in at 12/30/1969. And this the really, the the there were four areas that really zoomed in on private foundations. For the first time, we had an actual definition. What what is a private foundation? And, actually, section within the code just pertaining to these, what used to be called, charities with endowments that gave out grants. So now they're called private foundations. The other item that came into play, you know, we're just talking about the excise tax. Back then, there was a 4% excise tax on net investment income. And later on, we're gonna talk about how that tax was eventually reduced two or three times up to the current amount of 1.39%. But the purpose of the excise tax way back then was to make sure that every large foundation was audited every other year. And they never defined a large foundation, but somebody that was involved with the tax reform act of 1969 said, internally, they considered a large foundation back then with with any entity that had over $500,000 of assets. And then what what they wanted to do was point every other foundation that's out there at least once every five years. At the end of the day, going through the next five to seven years, they realize, the senate, IRS, that there really wasn't a lot of bad actors within the private foundation community. And because of that, as we'll see later, that that found that that amount that tax was actually decreased. And, also, these you know, we currently have this 5% minimum distribution requirement. Back then, in the '69 act, it actually started off at 6%. That 6% of basically of your what's called your non travel use assets, which is a fancy name for your cash and investments, this had to be spent in the form of what's called qualifying distributions, grants, and grant related expenses. Last but not least, the fourth item that came about with private foundations is for the first time, something called self dealing. A self dealing section that just pertained, and Valerie is our guest speaker on this, and we're gonna spend a good half hour just on self dealing what it is. We have mostly private with public charities, I guess, I should say, have private and and that sort of aspect. The self dealing goes to the next level and actually replaces private and economic rules in certain aspects. One item I I did wanna mention because there's always been talk since then. I know the so called ACE Act a few years ago had a provision that new foundations, should possibly sunset after twenty five years. As part of the working groups in the 69 Act, there was a lot of talk to put in a time frame, a forty year limit for private foundations, actually initiated by senator Al Gore. That's, that's Al Gore Gore Clinton's DAAC, but that never came into play. And another name, Walter Mondale, was against that. But that never came into play about sunsetting any foundation. So, and then, you know, just thinking back as somebody that practices, I think, and I mentioned we handle approximately 700 private foundations today. So many of the very few of our foundations actually have a sunsetting provision. I'm gonna say less than maybe 3% per se. So that's the history. We went a little bit about what's happening politically, out there, but maybe let's get into the meat of the September And, Anand, would you like to take us through page one? You know, I think it's important, to remind everyone, you know, when we think about the September it is a public document, with really a wealth of information about a foundation. Its employees, salaries of them of certain employees, salaries of awesome directors, every grant that you make, that is made to a grantee, the grantee's name, address, the purpose of the grant is there as well, the dollar amount. Every investment that foundation is invested is also required to, to be on as well. So, sorry about that. Just put my camera back on. So, again, it's it's very important, that this return is completed as accurate as possible. So let's get into page one. I think what's important about page one, it really touches many of the aspects where the things that Tom just mentioned. Right? So Tom mentioned the excise excise tax, the distribution requirements. Page one actually touches specifically on those. The dollar amount that the foundation will ultimately pay the excise tax on is on page one. The dollar that the foundation pays to meet those qualifying distributions that the required distribution requirement is also listed on page one, and I'll walk you forward through that as well. So let's start with the top of page one, more of informational, more just information about the foundation. You see on top, the calendar year or the year end for the foundation, you'll see that's left blank. That's specifically left blank. It's only completed or a a month and day is put in there only when the foundation has a fiscal year end. When the foundation has a calendar year end, such as this example, it's a December 31 year end. And on the upper right hand corner, you'll see 02/2004. So here, this is a 12/31/2024, year end. Biloba is the name of the foundation and the address of the foundation. There's gonna be a common theme you're gonna hear throughout these presentations when it come to addresses that are, listed on the nine ninety A lot of times, we work with a new client. We just pick up a product foundation. The first thing we do is review the non IPF. A lot of times we see personal addresses listed there, and that is a big no no. The last thing you wanna do is provide as I said, it's a public document to have somebody's personal address, whether it's an employee or or, or an officer. And, you know, you have this quantile grantee or grantee may have turned away. Again, you don't want somebody knocking on on your door. So that's important to make sure the address is the foundation's physical address. And if that's not available, you could do a care of care of your attorney's address or maybe your account's address. Moving down to column g, another important or box g, I should say. It's another important section here. This is something out of ordinary, for the year or or occurs, whether it's a a final return, an address change, a name change, or even an amendment of the return, you're required to disclose that and check one of these boxes. Not too long ago, we worked with the clients that their prior accounts filed their September. There there's an error, noted by those prior accounts. They the they corrected the error and send in the revised or amended return. But that box amended return was not checked off. And that just created a lot of confusion at the IRS. And, of course, the IRS received two returns with conflicting information. So and, again, it takes a lot of time to rectify those changes. So we wanna make sure that that is, those boxes are checked off if they are applicable. Below that is call sorry. Box I. This is probably the first number or the first area I look at when I review an I 90 p f. Alright? You're required to disclose there the foundation's fair market value of all its assets. Right? And that gives you an idea of the size of the foundation as well. That number, I think, is very important. It's agreed to part two column c, line 16, or the balance sheet. Right? And if it doesn't, obviously, there's an issue and you should, investigate and ask questions. Moving on to the right of that is box j. Box j foundations are required to disclose their accounting method. Another common error another common error we see, that method does not is not aligned with where the found what the foundation maintains its books and records. So what I mean by that, if the foundation's books and records are maintained on a accrual basis, an accrual basis should be checked off. Here, it's a modified cash basis of accounting. Now important note to make is really no right or wrong basis. The modified cash basis of accounting is an accepted basis, and I think probably for majority of foundations, probably the preferable, basis. Only because the modified cash basis is pretty much in line with the nine ninety Meaning, it's on the cash basis in terms of distributions, but also investments at fair value as it also required on the nine ninety three. Another item I'd like to mention here, you know, most states accept the modified cash basis. Some states, more specifically California, you wanna make sure, California has specific requirements depending on a threshold, that it may be exceeded in terms of contribution. It may require an accrual basis financial statement and accrual basis box checked here. But again, it really depends on the state that you're in. California is one of those, states that require. So to move on to the next page. Well, we have a poll of questions. Let's do that first. So what type of accounting method is used to prepare your federal form nine ninety p f? A, cash, b, the cool basis, c, modified cash, or d, other. I'll give you two minutes for that. Alright. So moving on, the income or the revenue section of the nine ninety p f, you know, few things we need to consider here and and and think about. If you see across the top there, we have four columns, column a, b, c, and d. Column c, we're not gonna really get into too much here. Generally speaking, column c is prepared by, what we call operating foundations. Jason Belotti will walk us through specifically operating foundations, the distribution requirements. They're a little different than a grant making foundation, but, again, we're not gonna cover that here. Back to column a, you'll see column a says revenue and expenses per books. So that, generally speaking, is gonna mirror your financial statements, whether it's an audit financial statements, a review financial statements, or a an internally prepared financial statements. Again, that's gonna be in the same basis of accounting that was, checked off on top. The only item I think you will that you will not see on the income statements for a private foundation on page one is unrealized gains. Unrealized gains are recorded or captured on the next page on the balance sheet as an adjustment to net assets. Everything else will mirror your financial statements or the p and l on your financial statements. Moving over to the shifting over to the right, the net investment income column, that's column b, that is the column that foundation pay the excise tax on. As we go on a few more slides, the bottom state of, column b or your net realized investment income, again, that's, excise tax, that is applied there of 1.39%. And all the way to the right is your column d. Now column d, just to remind everyone, and you'll hear this a number of times, column d is disbursements for travel purposes, cash basis only. So that's very important regardless what is the basis of accounting the foundation follows on its books and records. Column d must be in a cash basis. The IRS is pretty clear for contributions to count or for any expenditures to cash, qualified distributions. They they need to be cash out the door. So a few things to touch on here specifically on these, for example, line one here. You see line one is where a foundation will disclose its contributions that it's that it receives. And you'll see that in column a only, not in column b because, obviously, contributions are not taxable. Below that, we have interest in dividends, realized gains on investment, also usually the large components of that realized investment income for private foundations. A couple items I think I'd like to just spend a few minutes on here. You know, a lot of times, we account select things to foot down or foot across. You're not gonna see that on this page, for for for many reasons. For example, here, when we look at the realized gain on investments, realize here for this presentation purposes, the, you know, the the return of the company is pretty straightforward. However, many foundations do invest in what we call alternative investments, private equities, hedge funds. Those generate k ones. And the k one activity usually is a taxable activity, and that's the activity you see in column b. So column a and column b may not agree, and that's okay. In addition, foundations that may have what we call unrelated business income, that income is taxed at a different rate, and that's you're only speaking picked up on the full nine nine d t, and it will not be picked up on column b here. It may be disclosed in column a, but not column b. So to avoid double taxation, anything you pay on on unlimited business income tax on, you will not pick up in column b. One other item I think is important in column b is the realized gain. Realized gain and the items realized losses obviously can be captured here on column a only. So if a foundation experiences a realized gain in any given sorry. A realized loss in any given year, it cannot be reported on column b, which means it can't your column b can't be below zero in terms of any realized gains or losses. K? Below that are the other income, the components of the other income. Generally speaking, and I'll move to the next slide. First, what we see in other income is litigation proceeds, royalty income, and it's, generally speaking, taxable. There are times where foundations may have program revenue. That is reported also as other income. However, it is not in column b. It's only in column c. Again, program revenue would not be considered, taxable for a profit foundation. So to move on to the lower part of page one of the founding of the September p f. Nice. So this is these are the expenses, of the September p f. Again, similar to the revenue, column a is for books, column b is investment related, and column c is expenses for travel purposes. High level, a few items to to touch on here. If you look at column d all the way to the right, the $4,700,000, those are the amounts, as I mentioned earlier, that go to satisfy the foundation's distribution requirement. Column b, on the bottom of column b, the 5,600,000.0. Right? That is the dollar those of that amounts you're gonna pay the excise tax of 1.39%. In this case, that's approximately $78,000, and you will see that further down in in the next few slides. A few line items here I'd like to point out. Obviously, line 13 on top, compensation of officers and directors. That is the proper way of treating it. Common error sometimes, those amounts are lumped with other salaries or wages, and that's incorrect. But you also wanna make sure that a $185,000 agrees to part seven of the nine ninety That's where you actually list the names of the offices of directors and their salaries. Another common mistake that we see, when we review the nine ninety line 15, pension plan and employee salaries, I'm sorry, employee benefits. That line should also include payroll taxes. A lot of times, in error, taxes are included in payroll taxes are included on line 18. Again, the instructions for, are pretty clear that they belong in line 15. Below that, line 16 a, b, and c, typical expenses or professional fees incurred by the by the foundation or a foundation. Usually, it's legal fees, accounting fees, and, of course, all the professional fees. And the majority of that usually is the investment related expenses as you see here in column b. I think also important to note that there are some allocations that are made to column b. Generally speaking, expenses that go on column b are expenses of directly related in the procurement of investment income. So keep that in mind. Here, for example, salaries and wages of all the compensation of office and directors, there's a a a an allocation here. But, again, as long as those expenses are related to the pro formant of income. As we move over to column d, just to remind everyone, when we think about column d, what towards what goes towards being in that qualifying distribution, it's not just a grant the foundation makes. It's pretty much, generally speaking, all expenses that are incurred by the foundation for the exception of investment related expenses, of course, taxes, and depreciation. Now why depreciation? Foundations have the ability to take qualifying distributions for capital improvements. Capital improvements are considered for travel purposes the day or the year that they actually incur those expenses. So not to double dip, you could take that. And, again, Tanya Miranda will walk us through that on page eight where that where you where we show the foundation are able to take those qualifying distributions in the year that they incurred. And taxes, of course, excise taxes are not considered qualifying distributions. However, they are a component of arriving at the distribution requirement. And, again, Tanya Miranda will walk us through that page, when, when we get there. Yeah? And I think the really the last item, I think it's important to note when we think about product foundations and and page one. On the bottom of column b, the 5,600,000.0, that is the taxable, amount as I mentioned earlier. Let's assume that amount was a negative for the year. The foundation ultimately experienced a loss. What's important here is unlike, most, IRS forms, whether it's for profit companies or individuals, losses cannot be carried forward or back for private foundations. So any losses incurred pertain to that year owned. Right? So that concludes our presentation on page one. I will now turn it over to Jonathan Monfellow who will walk us through the next couple of pages of the nine ninety p I. Jonathan? Thanks, Anant. Let me just find my starting point. Okay. So hi, everyone. For those who may not know me, my name is Jonathan Rapola, and I'm a director in the Pride Foundation practice specializing in both tax and audit. As we move along with the nine ninety I'll begin my section with page two part two, the balance sheet. This slide shows the assets to the foundation. You will notice there are three columns presented, the beginning of the year book value, end of year book value, and end of year bear market value. Starting with line one, this breaks out cash from non interest bearing accounts, such as checking accounts. Line two breaks out interest bearing cash and cash equivalents, such as from savings and temporary cash investment accounts. This return is on a modified cash basis where generally receivables and liabilities balances don't exist. However, if the foundation was on the accrual basis of accounting, lines three, four, and five would break out the accounts receivable, pledges receivable, and grants receivable, if applicable. Line six would present receivables from disqualified persons such as officers, directors, or trustees. This is one of those transactions that requires the disclosure on page five of the return for loans with a disqualified person and will be covered later in the slides for any potential risks of self dealing when these types of receivables exist. Line seven presents notes and loans receivables less any allowance for doubtful accounts. Line eight presents inventories for sale and use. However, that is a less common asset that we see with foundations. Line nine is where the prepaid expenses and deferred charges are presented. And then below that, line 10 breaks out the different types of investments consisting of US and state government obligations, corporate stock, and corporate bonds. Line lines eleven and twelve, investments in fixed assets and mortgage loans are less common types of investments held by foundations. Line 13, other investments is where your mutual funds, ETFs, and alternative investments are presented, including hedge funds, venture capital, and private equity funds. For investments in column b, the book value reporter will depend on the method of accounting marked on page one. So if you're on a cash basis, the book value will represent cost. The column will generally mirror your books and records and audit financial statements. If you're on the accrual basis of accounting, columns b and c in most instances will match presenting the fair market value within both the book value and fair market value column columns. Column c is required to report fair market value regardless of the method accounting selected. Line 14 presents fixed assets and related accumulated depreciation. Line 15 reports other assets such as prepaid excise or UBTI taxes, program related investments, right of use assets, and other miscellaneous assets that don't fall into the other categories on the balance sheet. And lastly, line 16 totals all of the assets. K. Over the next several slides, I'll begin through, I will be going through various statements that break out the detail of the balances summarized on the balance sheet. Statement seven breaks out the investment detail that falls under US and state government obligations from the balance sheet. So you will notice that US government obligations are checked as US government, where the state and municipal obligations are checked off as other government. Statement eight breaks out the detail of the corporate stock from the balance sheet, which is required to disclose each individual stock and number of shares. In statement nine, corporate bonds are broken out similarly to how the corporate stock is. Statement 10 breaks out the other investments noted, noting the valuation method at fair market value. The alternative valuation method would be cost. The statement primarily includes mutual funds and ETFs, but alternative investments would also be presented here as well if that were the case. And statement 11 presents the other assets of the foundation. In this case, it's copyrights and program related investments. So now we have a a CPE question. Number four, does your foundation have alternative investments such as limited partnerships, private equity funds, etcetera? And yes, b, no. K. Swaddler. So we're we're going to continue to the bottom of page two, part two, the balance sheet presenting both liabilities and net assets. If your foundation is on the accrual basis of accounting, you would present liabilities with line 17 presenting accounts payable and accrued expenses, line 18, grants payable, line 19, deferred revenue, Line 20, loans from officers, directors, and trustees, and other disqualified persons, which is also require a required disclosure on page five for transactions, with disqualified persons. And then line 21 presents mortgages and other types of debt. Line 22 presents other liabilities such as deferred excise tax liability, lease liabilities, and any other liabilities that would not fall under the other categories. Moving moving to the net assets or fund balances section, foundation should always ensure it is checked off that the foundation follows FASB ASC nine fifty eight, except in very unique situations where that would not be the case. On line 24 within this return, all the net assets are without donor restrictions. However, foundations may also have, net assets with donor restrictions that would be broken out in line 25. And lastly, line 30 totals the liabilities and net asset balances. At the bottom of page two is part three, analysis of changes in net net assets or fund balances. Line one pulls the total net assets at the beginning of the year from page two, part two, column a, line 29, which must agree to the prior year return. Line two presents the excess of revenue over expenses and disbursements from page one, part one, line 27 a. Line three adds other increases not included in line two, such as unrealized gains on investments and deferred federal excise tax benefit. And line five, subtracts decreases not included in line two, such as unrealized losses on investments and deferred excise tax expense. Line six, totals net assets, which grows to part two, part, page two, part two, column b, line 29. Now moving to page three part four, capital gains and losses for tax on investment income. Capital gains are broken out by the various categories. In this example, publicly traded securities and capital gain dividends are listed, which are not required to be broken up by individual security. Capital gains and losses from all term investments, such as hedge funds, private equity funds would be broken up by individual investment. Line two totals capital gains and losses, which agrees to to page one part one column b line seven. It is important to note that if there is a net capital loss, page one would report a zero balance in column b line seven. These capital losses can only be used to offset capital gains in the same tax year. Foundations cannot use investment losses to reduce net investment income below zero for tax purposes, and losses cannot be carried forward to future periods. At the bottom of page three is part five excise tax based on investment income. Some foundations are exempt from excise tax tax as an exempt operating foundation. If that is the case, you would check off as such within line one a and put not applicable on line one. For all other domestic foundations, line one will calculate the 1.39% excise tax of net investment income from page one part one column b, line 27 b. Line five presents the total excise tax based on investment income. Line six a includes credits from prior year overpayments plus current year estimated payments. Line six includes any tax payments made with the extension, and line seven totals those payments. Foundations are required to make estimated payments if the foundation foundation will owe at least $500 in excise taxes. If estimated payments are required, those payments are due on May 15, June 15, September 15, and December 15. Foundations that are considered large organizations with taxable income of a million dollars or more in any of the three prior tax years must base their estimated tax payments on a 100% of the current year's tax liability. There may be penalties for failing to make sufficient estimated tax payments, including interest on underpayments, and that would be reported on line eight as calculated from form twenty twenty, twenty two twenty on the return. There may, line nine would present any tax due. In this case, the total credits and payments exceed the tax on investment income. Therefore, line 10 shows an overpayment, which can either be refunded or credited to the subsequent year's estimated tax, which is what we see generally suggest. So this concludes my section, and I'm now gonna pass this over to Joseph Ali who will be covering the statements regarding, activities section. Great. Thanks, Jonathan. Sorry, Jonathan. Did you have the slides? Alright. So while we get to the slides for this particular portion, part six a, statements regarding activities. So again, these are those compliance questions, where we are informing the IRS, and this kinda shows where past and future areas of focus, are for the IRS and and those in, the legislature. It's also a self reporting tool in terms of what we're doing as a foundation and how we're going to disclose that information. So we jump into the first couple of questions, questions one a through c. You start to see here, these are some of those questions like Tom talked about earlier on, about whether or not foundations are getting involved, with trying to influence any type of national, state, or local legislation, for example. So these are typically answered no. We don't see them answered yes all too often. If a foundation, did happen to have to answer these questions yes, there's some other questions a little bit later on in the return, that that basically allow for that to be explained more fully and potentially, could be some payments involved with that as well. If we go down, to the next area, it's really, question two. Has the foundation engaged in any activities that have not previously been reported to the IRS? So, again, we talked about that application for exemption, the form ten twenty three. And again, if it's a typical, grant making private foundation that decides to then pivot to do something different, that might be enough of a pivot that would require checking this box yes and informing the IRS of that. If the foundation goes from making grants, to maybe also running a children's summer camp of some sort, for, educational purposes, that would probably be something that's enough of a shift, from a private grant making foundation that would wanna be told to the IRS and updated accordingly. What's important here is that for those types of pivots, there's not necessarily always a preapproval process that is necessary. There are certain types of changes, that foundations might undergo that would require pre approval. And that's mostly in the area of grants to individuals, which we'll talk about a little bit later on. Okay? In terms of any changes to the, Line three, any changes to the actual bylaws or the governing instruments of a foundation, you would be required to attach those as well to your, Federal Return. And those would be a conformed copy with an authorized signature. And really each time those documents are updated, that would be attached and submitted accordingly so that the IRS's file is complete and current. Moving on to questions four a and b. This is with regards to, unrelated business gross income. So anytime you have unrelated business gross income of a thousand dollars or more, and again, this is gross income, not net, then the foundation would check the box yes, and also have to check the box yes if it has filed a form nine ninety t. We can't tell you how many times we see private foundation returns out there in the public sector, in open forum that they are actually filing form nine ninety t's because they do have unrelated business income, but this box here is not checked yes. So there's something to keep in mind there. Line five, was there a liquidation, termination, dissolution, or substantial contraction, at the foundation? And if so, they want to know why. So clearly liquidation, termination, dissolution, very straightforward. You would inform the IRS as such. Substantial contraction, based on the IRS definitions, this would be a 25% contraction in the foundation size. And this is really as a result of maybe a a large grant or a series of grants or some sort of transfers, not necessarily market returns, as it were. So that's something that we we definitely wanna focus on and inform the IRS of if there was to be a a signature grant made that ultimately reduced the size of a foundation, so on and so forth. Item six, these are some technical matters, with regards to, sections 4,941 through 4,945 of the Code. And basically, this is standard language that's in most foundations governing instruments, language such as, language that prohibits self dealing, for example. So this question is actually one of those questions you want to have checked as yes, but so often we see it checked no, accidentally usually. Because usually the governing instruments do have that particular language in it. And then lastly, line seven, most of the foundations on this call today. Again, did the foundation have at least $5,000 in assets at any point in time during the year? Going on to the next page. So this is, Part 6a continued. At the top here, you'll see, federal, it's a federal requirement to send a copy of the federal Form nine ninety to the state, that the foundation is located in. So, again, whether it's, the state AG, the attorney general, or the secretary of state. And, again, this can also be impacted by things such as unrelated business income tax returns, and the like in terms of where, revenue is being derived from. If we move on, to, Line nine, is the Foundation claiming status as a Private Operating Foundation? So most of what we're talking about here today is for the non operating foundations. I know we have some operating foundations on the call as well. And one of my colleagues will actually be covering some of those private operating foundation tests. But typically, when a operating foundation is formed, it it it usually says it's such on their ten twenty three, on their application for exemption, that they're going to be a private operating foundation from the beginning of time. Right? But we have seen foundations over time during their life cycles change from being a non operating foundation to a private operating foundation. So again, if that was a particular year that that change, started to take place, then we would have, some disclosure there on that and the Private Operating Foundation tests would then be required. Question 10. Did any persons become Substantial Contributors during the tax year? So this is where the IRS wants to know. When we talk about persons, this includes individuals, trusts, estates, partnerships, associations, corps, other, type of entities, because as a Substantial Contributor, you essentially become a Disqualified Person. So maybe somebody who is not a current board member or an existing contributor to the foundation becomes one, then that person would actually be considered a Disqualified Person. And things such as the self dealing rules and other considerations would then apply to that particular individual. And how do we determine what a substantial contributor is? It's anybody that's ever given, in the in the current year, for example, the amount that they have given is, more than 2% of the total lifetime contributions to that particular foundation and over $5,000 so so, again, that's how those people get listed, and they only get listed that first year, the year that they become a substantial contributor. Unless they're a board member, then, there's there's further, disclosures of those board members' names over time as as givers. Going on to item 11, at any time during the year, did the Foundation directly or indirectly own a controlled entity within, the meaning of the section five twelve b 13? So this is the 50% test. So again, if the foundation owns an entity, more than 51% ownership of it, then it would be disclosed. Some examples of this, for example, is if a foundation owns a 100% ownership of a foreign blocker, for example. Other examples could be side by side foundations. Sometimes we have a non operating foundation that is primarily a grant making foundation. And then sometimes, maybe founders have a particular passion project or what have you. And those very same trustees have created another private operating foundation to pursue certain endeavors, and you might have some overlap there, that can be conservatively disclosed as such. The next one, item 12, did the foundation make a distribution to a Donor Advised Fund over which the Foundation or a disqualified person had advisory privileges? So again, we talk about the private Foundation return, signaling, particular areas of interest, to government or to the IRS. And and clearly, donor advised funds over the last ten, fifteen years have been a hot topic. And clearly, the IRS wants to know whether or not these types of transactions are occurring. So for this particular example, it's checked no. But if it was checked yes, it just requires a very simple explanation that the donor advised fund that the Foundation gave to is a qualified five zero one(three) public charity, so on and so forth. The next one, items 13. Did the Foundation comply with the public inspection requirements? Again, we talked about the nine ninety PF being a somewhat antiquated form, especially since everything now, for the most part, is in the public forum, on the IRS website, whether it's Candid or ProPublica, so on and so forth. But in theory, these public, inspection rules still apply and foundations would be required to make available, the form nine ninety and its governing docs and application for exemption if if requested. We also include the the website address for the foundation if they have one, who the books are in care of and a phone number there. Again, important. A couple of phone numbers throughout the form 990 We would wanna make sure, that, we know that those are good numbers and you know that the individual that's on the other side of them knows what to say if somebody is calling or asking particular questions. We'll kind of skip over 15s outside the scope for today's seminar. And again, item 16, at any time during the calendar year 2024, did the foundation have an interest or signatory authority, over a bank, financial account in a foreign country. So again, one of the themes that you'll see throughout the Form nine ninety P F, anytime a foundation's doing anything a little bit exotic, there's there's there's extra questions. And and one of those exotic, areas could be, the the international, forum. Okay? So depending on those thresholds, there's a separate form, the FinCEN form one fourteen. So if a foundation, owns a bank account in another country and at any point in time during that year had $10,000 or more in that bank account, then that form would be required to be filed, and it has its own, schedule for extensions and filing deadlines, so on and so forth. Okay. All right. So moving on to, Part six. B. So this is where we start honing in on whether or not Form 4,720 may be required. So this is, somewhat the the penalty box section of the Form nine ninety but it's also an opportunity for foundations to self report, if a a an event took place by accident or inadvertently. And I don't wanna steal Valerie's thunder too much. She's gonna go into those self dealing rules. But there are a couple other reasons why form forty seven twenty may be required to be filed. So just to focus on the, the self dealing questions here without going into what is self dealing, this is where it's asking questions about any type of transactions or interactions between the private foundation and those disqualified persons that we've talked about earlier. So, most of the time, a good number of these questions will be answered no. But certainly, there are foundations that have officers or board members that are compensated, or possibly reimbursed, for expenses, for example. Or they are actually maybe using some personal devices, or personal resources, and basically the Foundation is kind of accepting those, the use of those, from that disqualified person. So questions one, a, three and four are typically answered, yes, if you have some compensation, and other interactions. But the most important thing is whether or not there's any of these items that are checked, is the key here is is line one, b. And most of the time, this is answered no. And that and that's a really key answer on this as long as it's, of course, true and factual. But that's saying that none of these acts failed to qualify under the exceptions of the self dealing rules as a Strive in the Regs. Okay? So yes, we're saying we have compensation being paid, but no, it did not fail to meet the exceptions. Moving on, if if that question is answered yes, then clearly then the Foundation will be ultimately filing a Form 4,720, and potentially paying some taxes, which we'll talk about. The important thing here that you'll see in, Line 1D at the bottom is it also asks whether or not, any of these items from the prior year were not corrected before the first day of the current year. So one of the themes you'll see here is that the longer an issue stays open and it's not corrected, there tends to be more issues and penalties and more disclosure as time goes on, and it makes it quite difficult. So it's usually really important for any active self dealing, whether it's inadvertent or not, to be corrected in short order as to mitigate, the ultimate penalties involved, and we'll talk about those. Okay. Moving on to the next slide. So some of those other reasons, to file a Form 4,720 outside of the Self Dealing Rules. So one of the ones we see most often with with, some foundations that find us, we do speak all over the country at different, conferences and such. And and usually it's after one of those conferences, somebody ends up reaching out to us because they've realized that they have not been paying out enough, in terms of grant making. So that's the failure to distribute income. Okay? So here, this is where we start to talk about the failure to distribute income if a foundation is short on its 5% spend requirement. And we'll talk about how that, spend requirement works on a one year lag, essentially, a little bit later on. But let's just say if a foundation was $100,000 short on its, requirement to distribute, there would be a 30% tax. So you'd have that $30,000 tax, and you still have to get the $100,000 out the door. And if that act is not corrected timely, that tax could go to as much as 100%. So again, you start to see here in questions two a and two b, they the the IRS on the form is trying to capture, well, how many years do we have here? And unwinding these transactions and ultimately, getting foundations cleaned up is quite a bit of work. But where there's a will, there's a way. And everything's fixable. It might just come with a bit of tax. There's always a chance to try to have something maybe abated, and and kinda go through that process with the IRS. But for the most part, when these types of situations arise, a foundation may have to pay a little bit of extra or, in this case, 30%, on that amount. And that's why we always say that the 5% spending requirement is a nonnegotiable. It has to be spent. Okay? The next question, question three a. Did the foundation hold more than a 2% direct or indirect interest in any business enterprise at any time during the year? So questions three a and three b are all about the excess business holdings rules. So again, it's probably beyond the scope for today, to get into too much detail, but I think it's really important for foundations to keep track of their ownership percentages of maybe any, direct or indirect interest in these business enterprises. And you do also have to consider, whether or not the disqualified persons also have a particular interest in there. So there's some thresholds that we typically look at. We start to flag it once it gets over 2%. Once we get closer to that 20%, the the situation is certainly much more, serious, and we have to really understand that. Again, we've done separate thirty minute webinars just on excess business holdings. And, you know, when we're working with a new client, for example, that has maybe something coming from an estate, that's when we tend to see this the most is when maybe a particular business holding is making its way from an estate into a foundation, then there are certain rules that apply such as you have about a five year period to, dispose of that particular business interest. And in theory, you can get permission from the IRS for an additional five years, because again, maybe tightly owned businesses are not as easy, to get rid of as other types of investments in a particular portfolio. Questions 4A, is the Jeopardizing Investment question. So again, we don't see this all too often. Most foundations have a fairly, well rounded portfolio. But where this comes an issue is if perhaps the foundation has a 100% of its assets almost in one illiquid investment. How is that foundation able to then carry out its charitable purpose without getting more creative with other means of finding cash to actually distribute and and be, charitable in nature. There's some other interpretations of that as well. Again, we don't see it come up all too often. There's been times when different attorney generals have, maybe focused on one type of investment or another. But, again, for the most part, we see this as no because most folks have, like I said, that well rounded, portfolio for the most part. And you have to also think about concentrations there too. If if if a particular if you have one investment that makes up over 50% or over 75% of your entire foundation assets, what does that look like and and what have a risk parameters have been, considered with your investment policy statement, so on and so forth. Okay? There is a little known, trick, as it were, Line 4b. This is about, you know, securities, that were owned prior to 1969, but again, outside the scope for today's webinar. So we have a polling question here, and I'm going to keep going. Great. Alright. So to wrap up part six b on the 4720, this is where part six a leads into part six b. Right? So some of those questions about, political activity, for example, so there's that question, there, five A-one, about carry on propaganda or try to influence legislation, so on and so forth, or influence the outcome of any specific public election. The most frequent ones that we tend to see are actually five, three, and four. And again, these don't necessarily create a situation whereby a 4,720 needs to be filed. That would be if it is something was ultimately deemed to be a true taxable expenditure, then that would maybe be subject, to that particular tax. But this is, again, fact finding information. The first one is provide a grant to an individual for travel study or other similar purposes. So again, foundations are able to do that if they had pre approval, as part of their 10/23 application at their inception, or if they, wrote to the IRS and got permission to do so and the IRS goes through its steps to make sure, that it's not biased in nature, so on and so forth. Item four, provide a grant to an organization that other than a charitable organization described, in the section. So again, most private foundations give almost entirely to public charities, but clearly, we have foundations out there that give, both internationally, that give, to other private foundations from time to time, for certain projects and joint ventures, and then, sometimes even the for profit world. So, again, anytime those things happen, we'll focus on the foreign first. If if you're giving a foreign grant, foundations have two paths. There's equivalency determination or expenditure responsibility. If they go the, the equivalency determination route and it's determined that entity is the equivalent of a public charity here in The US and they've gone through all the IRS defined steps to determine that, then actually this box would be checked no. But if they went through expenditure responsibility, then this box would be checked yes. And later on, down on line d, you'll see that they maintained expenditure responsibility for the grant. And again, we have some thought leadership out on equivalency determination and on expenditure responsibility. If anybody would like to see those, they are available on our website. But a very key thing to just be aware of and then to disclose. And we have a statement on the next slide just to show that. Moving on to, item six and seven. We don't really see these much anymore, to be honest, but, some questions there. Again, kind of showing things that the IRS at one time perceived as being maybe issues in the private foundation world, such as, paid premiums on a personal benefit contract, or so on and so forth, or tax shelter transactions. But if we go on to item eight, there's a question there about whether or not a foundation is subject to tax on, excess compensation. So again, this was something that came out during the last, Tax Reform Act. So on any amount more than $1,000,000 paid to a foundation employee, there would be, an additional 21% excise tax. So with that being said, if you want to pay an individual 1,100,000 in comp, that $100,000 of excess, there would be a $21,000 of tax on that. So in order to pay $1,100,000 in Meaningful Comp, it ultimately would cost the Foundation, that extra $21,000 in taxes. Okay? And lastly, going on to the next page, we have some examples of the Expenditure Responsibility Statements. Again, we often see these are sometimes omitted because a grant is not being identified as an Expenditure Responsibility Grant. But once, this disclosure takes place, the reports might still be pending until a foundation hears back on how the funds have been spent by that other entity, whether domestic or abroad, whether it's a foreign organization or a private foundation here in The States, for example. Until that report comes back, there's no information provided beyond the fact that the grant was made and the purpose of the grant. But if we go on to the next example, this is showing that this particular grant was closed out. So you can see here that the original grant was $75,000 and, ultimately, the amount expended was $75,000 Okay? With that being said, that kinda wraps up my portion. I am gonna turn it over to Valerie. Valerie was nice enough to, adjust her presentation accordingly so that she's gonna actually leave, five minutes for Q and A at the end of her section specific to, self dealing. And we always say, sometimes with these self dealing rules, if you had 10 attorneys in the room looking at a particular transaction, maybe five of them would say, yes, it's self dealing. Some five of them would maybe say, no, it's not self dealing. But Valerie is gonna be our tiebreaker today on some of that. So, Valerie, thank you for joining us, and the stage is yours. Great. Joseph, thank you so much for for, that great summary, and thanks for having me today. I really appreciate our colleagues at PK, O'Connor Davies for, thinking of our firm and thinking about all these important issues with the nine ninety p f, including self dealing, which is definitely one that generates probably the most questions that we see. So I'm Valerie Sussman. I am a nonprofit attorney at Herwood and Associates. We're a law firm that works with a variety of organizations from public charities to private foundations of all sizes, including some fairly large foundations that do regularly deal with these, issues and questions. And so the purpose of this presentation is really, I know that Joseph was talking about sort of the reporting pieces. Right? So so where do we report self dealing transactions on the nine ninety But the goal of this portion is really to think about in advance kind of where are we thinking about, self dealing in advance of these transactions occurring, and how can we create an approach where we're really thinking about each transaction in its context and the legal rules surrounding each of those transactions so that maybe, eventually, we don't have to report these as self dealing transactions. And, of course, if that does occur, you know, as Joseph said, there are places to disclose this, places to take, you know, quick action to correct those transactions before there are some, you know, excess taxes that results from that. But the most important thing right now is to think about the legal context so we can kinda stop those in their tracks as they happen. So, we'll first be talking about the context. Again, you know, what what is a self dealing transaction? And, then we're gonna go over some definitions, both the IRS pieces as well as kind of some examples and when these transactions may apply. And then, in many cases, you will see that there are exceptions to when something is not considered self dealing. In most cases, the exception is a little bit more important than the rule as you'll find out because, in many cases, the exception is where you really can transact with a disqualified person under a very narrow set of circumstances. So we'll talk about what that all means. And then we'll go over very briefly, you know, some of the penalties that are associated with self dealing, and you'll see that those kinda take two tiers. We have a smaller penalty that has to do more with was there a self dealing transaction? If so, there's usually a tax imposed, but then you'll see there's a much larger penalty for when that self dealing transaction is not corrected by someone involved with the foundation. So we can talk about those two layers of taxes. And then, lastly, just, you know, the ability to identify and prevent self dealing going forward. Okay. So I just want to talk a little bit about the historical context of the self dealing rules. So these rules were primarily introduced in the tax act of 1969, and the idea was that there are some essential differences between private foundations and public charities, and the IRS made that very clear, through these various rules that were imposed for private foundations. Now why are there different rules for private foundations and public charities? In some sense, the IRS deems a private foundation, to be not as much subject to public oversight. So clearly, that's true. Sometimes, you know, a private foundation will certainly have more of a family run board. A public charity typically has more of an independent board. And the IRS really takes that into account when they're imposing these different rules on public charities and private foundations. Now some rules will apply to both private foundations and public charities. Certainly, the rules about, conflicts of interest apply to both. You still have to think about things like excess benefit transactions and excessive compensation. Those rules are are really not any different for public charities and private foundations. But here where we're talking about self dealing rules, you can almost see those as kind of a carve out in some sense to conflicts of interest. So they're very specific types of transactions that we have to think about a little bit more closely for a private foundation than we would, for example, with a public charity. Now, when we talk about conflicts of interest, I just wanna be clear that, you know, your private foundation should still have, a conflict of interest policy, but it may be that that policy specifically discusses these specific self dealing goals that we're going to go into, and there may be a separate section of a conflict of interest policy that actually relates to self dealing. Now we're gonna go into defining all of these terms because you're gonna hear some terms come up over and over, and I wanna make sure that everyone is very clear on what this all means and where these exceptions may lie. Okay. So, generally, what is self dealing? So this is embedded in the internal revenue code. So section four nine four one prohibits, certain transactions between the foundation itself and what's called the disqualified person to the foundation. And those transactions are gonna be prohibited whether they're direct or indirect. So what does that mean? Well, direct means that this is a transaction directly between the foundation and one of its disqualified persons who we will define. Indirect means, for example, you know, you might try to find a workaround. So let's say you think, okay. Well, I'll just make a grant from the private foundation to a public charity, and then that public charity can engage in the same transaction with a disqualified person to the foundation. So that doesn't work because that would be considered an indirect form of self dealing. Again, there are exceptions, and we'll talk about those. But I just wanted to make it clear where something is a direct versus indirect transaction. So we're gonna ask ourselves a few questions when we're considering whether something is self dealing, and then we get to the next step of, okay. If it is self dealing, what do we do? So the first question you would wanna ask yourself when a foundation is about to engage in a transaction and, again, this would be something that you're asking yourself at the outset of the transaction, not after it's already happened, you would wanna know if the transaction involves a disqualified person. So, again, we're gonna have to define this for you, and we will do that in the next couple slides. Then you're going to wanna ask, okay. So my foundation, let's say, is entering into a transaction with its director. That would be a disqualified person to the foundation. Then you're gonna wanna ask, is that specific transaction listed in in the internal revenue code or its relevant regulations as self dealing? And we'll talk about which transactions are listed as self dealing. And then lastly, if it is listed as self dealing, the most important question probably is whether an exception applies. Because if an exception applies, that transaction is not going to be considered self dealing. In many cases, you won't have to report it on the nine nine p f. As Joseph discussed, you know, you'd have to go into the specific questions and their definition. But in many cases, that would not be a concerning thing to report on the nine ninety because if an an exception applies, that is not considered a self dealing transaction. So let's talk about disqualified persons. This can be a little bit confusing, and it's pretty broad actually who is considered a disqualified person to the foundation. So the first category may be pretty obvious, but it's worth talking about. So definitely officers, directors, trustees of the foundation, and others who have similar authority or control. So the idea there is, you know, who really has either a signatory power or a leadership power with respect to the foundation. It's important to note that even if you have, an executive director, well, maybe they're not compensated, but they still are probably gonna be a disqualified person with respect to the foundation. So there can be other leadership roles who are actually employees, but not voting officers, directors, or trustees who may actually be a disqualified person. Another important category to talk about would be substantial contributors to the foundation. And who is a substantial contributor is actually going to vary on based on the size of the foundation in many cases. So, usually, it's, you know, the the threshold amount is $5,000, but it's actually 2% of the contributions in the prior year. So you wanna think about, you know, who among the individuals last year who donated to the foundation may actually be considered a substantial contributor, and that may change from year to year. So you're always gonna wanna be refreshing that look at who is the substantial contributor with with respect to the foundation because whoever is a substantial contributor then becomes a disqualified person where transactions between them and the foundation may raise some self dealing questions. So something to ask yourself every year. Then, in the third category, we have family members, of those listed above. So this is also pretty broad, but it also has some carve outs. So let's talk about that. It does include spouses and lineal ancestors and descendants, so that would be parents, grandparents, children. But it also includes those individual spouses, which really does make it pretty broad. It's important to note though in this case that family members do not include more distant relatives, but it also doesn't include siblings who may be close relatives, but the IRS just use that as a carve out. So important to know, who's covered in family. And then now we're up to d. So, we're talking about entities now that are controlled by disqualified persons, and those companies would also be considered a disqualified person with respect to the foundation. So this is something that you may consider having your directors, officers, and employees in disclose in their annual conflict of interest disclosure form. You're really gonna wanna put everyone on notice about what companies they're involved with and what they're a shareholder in so you can determine which companies would be considered disqualified persons with respect to foundation. And usually, what's considered a controlled entity in that way would be a 35% ownership interest. So that's just the the threshold, but, it it is helpful for more of that disclosure to occur so that the leadership of the foundation can can really consider those issues going forward. And then lastly, under e, we have certain government officials, and those will be considered disqualified persons to the foundation. Now the rules surrounding government officials can actually be pretty complex, and I would suggest if you're dealing with any government officials, with with a relationship with the foundation that you definitely consult a tax expert on that just because those rules are, pretty well developed and you'd wanna have someone analyze whether there is a self dealing transaction among those rules. Okay. So now we're on to the second question. First, we've talked about who is a disqualified person. Now we're talking about the transaction itself. So if you're a foundation manager, you're asking yourself, was this or could this be, preferably in advance, a self dealing transaction? And so, listed here are all of the ones that are listed, statutorily, so we really wanna think about, you know, does the transaction fall into any of these categories? Now if it does, we still have to ask the next question, which does an exception apply. But first, I'd like to go over, does your transaction fall into any of these categories because they actually have their own nuances within each of these. Okay. So, generally, the sale exchange or lease of property between the foundation and a disqualified person constitutes a self dealing transaction. Now, we're gonna walk through all of these, but I would say this one comes up pretty frequently. So the prohibition the general prohibition without any exception is actually, to or from the disqualified person to the foundation, so going in either direction. So let's say your private foundation has some unused space, and it asks, the disqualified person. Let's so let's say a foundation manager asked to lease the space from the foundation. So the question you're asking yourself is, you know, is that a self dealing transaction? And, so just to be clear, this is a good distinction between a private foundation and a public charity. So in this case, yes, that would be a self dealing transaction for the private foundation, which would be prohibited. But in the case of a public charity, there's a lot more flexibility for this kind of sale exchange or lease of property between the charity and a disqualified person. Usually, with a public charity, the parameters are that you have to kind of surround this with, you know, ideas about reasonableness. Right? So are the terms of the sale reasonable? Have you made sure that the the price is fair market value or below and that kind of thing. Now for a private foundation, it's just sort of a no go. Right? This is a this is a self dealing transaction. So we often would deal with this. Very common issue here would be the the space rental of property. So, you know, let's say, for example, that it's in reverse now. So let's say that, you know, disqualified person has a space that it would like the foundation to use, and it wants to offer that space, for a dollar a dollar of rent. That seems really low. Now that's actually still considered a self dealing transaction because there is some charge to the foundation. Now if the disqualified person offered that space at no charge, that's actually an exception. So this is where it gets a little bit tricky, and you really wanna make sure that you're looking very closely at the rules and the exceptions because it seems like such a small distinction, $1 versus no charge, but it acts actually makes a very large difference when it comes to following the self dealing rules. Okay. So let's look at the next example of what's considered to be a self dealing transaction between the foundation and one of its disqualified persons. So the next one would be the furnishing or receiving goods or services for value. So I'll just give an example here because I always think it's a little bit easier to consider something concrete with these rules. So let's say that the daughter of a foundation trustee owns a restaurant. And, again, that daughter would be a disqualified person because they're a direct lineal descendant of another disqualified person who's, the trustee of the foundation. And in this case, let's say the foundation, would like to go to that restaurant and and have dinner there. And maybe it's a fairly expensive dinner just to, create a concrete example for you all. So in this case, you know, so so let's say, the foundation decides to have dinner there, but the restaurant decides to get that meal for free, and the meal is for foundation purposes. So perhaps it's a business dinner to, run a meeting for the directors. It's a reasonable dinner, and the restaurant gives that for free. So that would be considered an exception because, again, it's it's donative. Right? The restaurant is giving that for free. Now if in contrast, your, directors decided to eat at this restaurant, which again is owned by the daughter of a disqualified person who is herself a disqualified person to the foundation, and, that meal was charged at a pretty high fee by the restaurant, That would most likely be considered a self dealing transaction that would be prohibited. So this is where the nuances are really important because you can see there are exceptions, and there are also situations where it may not, be on the surface that this is a self dealing transaction, and so it's important to really consider these rules. Now I wanna talk about a couple of these other exceptions because I think they're very important. So one of these that comes up a lot would be the first one. So reasonable compensation for employment. We see this very frequently, for example, with investment managers of a foundation. So someone might ask me, as their attorney and say, okay. Well, we have this private foundation and I really wanna hire my daughter because she's an amazing investment manager and she's really great at her job, but can I do that? And the answer would be, in some cases, yes. So initially, this may be considered a self dealing transaction because your daughter would be a disqualified person to the foundation. But there is this carve out for reasonable compensation for employment. So if your daughter is in fact an expert in this area and the board could determine that she is and that it makes sense to hire her and if her compensation is reasonable and services are necessary to the foundation, and, again, it is important to consider whether they are necessary. So you wouldn't wanna hire her for something like, I don't know, a birthday party for directors, which is not necessary, for the foundation's operation. But for investment management services, certainly, it could be argued that that is necessary. So the board would have to go through an approval process that, of course, involves the usual conflict of interest determinations, but you would also have to, use this carve out to the self dealing goals, and and this would be deemed an exception under most cases. So we'll talk about this a little bit more, but I would say this is one of the most common exceptions that are used for the self dealing rules. Now let's, we went over the second one a little bit with with the restaurant example, but the third one I wanted to go over a little bit as well. And that one is you can furnish or receive goods or services for value, between a disqualified person and the foundation if those services are available to the disqualified person on the same terms or basis as available to the general public and if the services are related to the foundation's charitable purposes. So what does that mean? I'll just give you an example. So, let's say there's an art exhibit and perhaps your foundation has a mission related to art and artists, and there's an art exhibit that's really important to the mission and there's a mission to that art exhibit that cost a fee. Now the foundation could offer admission to that art exhibit on the same rate to the disqualified person, so let's say to a trustee, as they do to any member of the general public. Let's say that's $50. And if everyone's paying $50, that's considered an exception to the self dealing rules. Okay. So let's go over one more example here, which is the lending of money or extending credit. So this is another common situation that comes up. And, so the exception here was would be if the credit is extended from the disqualified person to the foundation without fees or interest, so again, it's donative, and if it's used for the foundation's charitable purposes. So usually, it's this two part test or perhaps a three part test, but you'll notice that one of the common situations where an exception applies, it's important that it is actually related to charitable purposes. So let me give a concrete example when it comes to credit cards because this is actually one of the most typical situations in which this exception comes up. So it may be that a director of a foundation has a foundation credit card, and that's actually fine, and it could be a really good way to more easily conduct business in the foundation. Now what happens if that director accidentally uses that card at the grocery store to buy some groceries for personal use? Well, there's sort of a mixed view on that. Now if that was done by accident, you know, it could be considered a self dealing transaction. If it's done on purpose, definitely a self dealing transaction. But let's say it's by accident, you know, just, you know, honorable error. You're at the store. You pulled out the wrong card. You made a purchase, and it wasn't for foundation use. Now what you could do and what you should do is, first of all, reimburse the foundation as soon as possible for that misuse of funds. And it's sort of a question, you know, maybe this would have to be listed as a self dealing transaction on the the tax return that was corrected, or maybe if it's paid back soon enough, it wouldn't, and and there's some differences of opinion on that. But in any event, it's very important that you get that corrected as soon as possible and that typically you would want the credit card to be used just for reasonable foundation expenses that are necessary for running the foundation. Okay. So we talked a little bit about this exception previously, but this goes to when you pay, compensate, or reimburse a disqualified person for, in some cases, services, but in all cases, for something that is necessary to run the foundation's business. So we did talk about this in the context of hiring. Right? Hiring an investment manager. There are a couple of other situations where this comes up that I think are important to go over. So this may come up in terms of reimbursement for reasonable expenses that the foundation incurs. You know, perhaps you're hosting a board meeting and there there were a few expenses associated with that. Generally, it's okay to reimburse for those expenses, again, if they were necessary for foundation business and if they're not excessive. So you really do have to look at, also the difference between personal use and business use. You might be able to reimburse, for a dinner that was related to foundation business, but then if you're meeting socially and it just happens to be all of the directors there, that would not be an appropriate reimbursement and could be considered self dealing. We also hear about this in the context of board fees. And this is something that can be a little bit tricky because generally board members of a private foundation or even of a public charity, they they're typically considered voluntary, but there may be some services that it makes sense to compensate them for because maybe they are going a bit above and beyond their board duties, and it may make sense to pay them a small board fee. So, typically, that's okay if it's in reasonable balance and it's considered an exception here. You just really do have to be careful that it doesn't become sort of an excessive board fee. And then lastly, we do see this come up quite a bit, with, directors and officers insurance premiums. So it is reasonable and expected that as a director of a private foundation or a public charity, you would wanna have directors and officers insurance. And that's important because, you know, liabilities do come up in running this kind of organization. That's considered reasonable and customary to obtain an insurance policy for that. Now it's important when you're looking at the terms of the policy, though, that you don't accidentally fall afoul of the, self dealing rules. And one way to do that is to think about the terms of the policy. So is it reasonable? Is it necessary for the level of protection that your foundation will need? If your policy kind of goes above and beyond and is a very expensive policy and perhaps provides some other personal coverage for either other businesses or individual coverage, well, that may not be appropriate as this exception to self dealing, and you may have to look at that a little bit more closely. Okay. And finally, I just wanted to go over this last exception. Again, these are gonna be examples of where something is not self dealing because it falls into an exception to one of the rules. So this one is the transfer use of foundation income or assets by a disqualified person. So I wanted to go over maybe one of the most common examples of this. So often we will be asked the question, okay. We're holding, a foundation event, and it's to honor the directors for their wonderful service. We wanna give them a nonmonetary award, so we just wanna give them a big thank you, basically, and say, hey. Great job running this business and this organization, and you've done a great job fulfilling the mission. And we wanna know if that's okay or if that's gonna be considered self dealing. So, generally, it would be okay for the foundation to allow directors, officers, or those really running the foundation to attend that kind of event and to give them some public recognition. Because while that may be considered some kind of benefit, it's not considered, a very substantial benefit. It's considered incidental and tenuous. So in that case, just thanking them for their service, thanking them for their good work, not a problem. Now if they were to attend that same event and they were be they were to be given a large monetary gift from the foundation, for their service, that that could be self dealing. And so that's where you have to take a a closer look at what is the benefit that's being given to that disqualified person through the foundation's assets. Now we also receive the question sometimes about whether you can invite others to a foundation event and whether you can comp those tickets through the assets of the foundation. So, generally, it will be okay. Again, directors, officers, trustees, those closely involved with the foundation's business to attend an event and have their tickets paid for because that's part of the foundation's mission and work. But you have to be really careful about spouses, friends, business partners. The foundation should not be paying for their tickets, right, because that's not a charitable purpose, not connected to the work of foundation, and so could be considered self dealing. And I guess, lastly, I just wanna go over this, what seems like a bit of an obscure example, but it actually does come up quite a bit. So sometimes we run into situations of pledge matching programs, which actually can be very nice programs where the foundation offers to match the donation of a donor and say you know, basically saying, if this person gives $500, we will also give $500 to to a charity of choice. So that can be a really nice program, but I just wanna note this has to be very carefully tracked legally. And I would suggest if you're thinking about doing any kind of pledge matching program that you consult a legal or financial expert about that, mainly because you don't want the program to be perceived as paying off someone else's individual pledge or debt. And if if it happens to look that way, that could be considered self dealing, and that's where that falls into these rules. So So I would just suggest being careful about those programs, not to be dissuaded from doing them because they're great programs, but just get a little bit of legal support where needed in setting them up correctly. Okay. So we're gonna kinda race through this one a little bit just because, again, payments to government officials, they're statutorily defined, very complex. Again, an area where I would suggest you get a little bit of legal support if you're dealing with any kind of payments to government officials through the foundation. And there's some some specific rules about contracts for employment, which are listed here for your reference. But, again, definitely worth, consulting an expert on this one. So quickly, before I take a couple questions, I just wanted to go over the penalties because because, again, we have a bit of a two tier system here. The first set of penalties is designed to say, okay. You had a self dealing transaction. We acknowledge that, and, hopefully, you're gonna do something to correct it. But if you don't, the penalty is gonna get a lot higher. So, I just wanna be clear though that so and this is why it's important to be so mindful of these rules. The penalty is actually imposed on the disqualified persons themselves. It cannot be paid by the foundation. So, unfortunately, if you end up in a situation like this and you're a manager of a private foundation, you may be may be out of luck and you're talking about some personal payments. So the initial penalty, for the disqualified person is 10%, and you have to repay the foundation for the the funds that were, owed to it, as a result of the transaction that should not have taken place. For foundation managers, the penalty is 5%, but it can go up to $20,000. And then, this is for each year that the self dealing occurs, so it can be an ongoing penalty. I also wanna note it can increase to 200% for disqualified person foundation manager, if not corrected right away. So you can see how that kind of scales up pretty quickly. So, basically, and I'll take questions in a second. I'm happy to do that. But I just wanted to mention that there's a bit of a reputational issue here. Right? Because you may say, okay. We have the funds to pay these penalties, but these transactions will end up being reported also on the nine ninety p f. So you have that public document there. And this is why it's just important, you know, not to be scary about it, not to be worried about it, but just to say, okay. We can look at these transactions upfront before they occur. Hopefully hopefully, have a little bit of education now as to what constitutes a self dealing transaction, and maybe you can be mindful about entering into these so that in many cases, you can find when an exception applies. Or if not, you just don't enter into that transaction in the first place. So now at this point, I would love to take perhaps one or two questions. A lot of questions and concerns as well. Yes, Valerie. As expected, a bunch of questions have popped up, during your session. So I'll I'll just, ask those, you know, obviously, we're gonna be mindful of the time. Right? But, I think it's important that we at least present these to you. So first question is, are personal hotel or airline point accounts considered self dealing? Well, they can be. Right? So, you know, you're gonna have to go through that series of questions, and I would say so it depends, as with with most things. But if you're talking about personal use so one of the factors that I wanted to emphasize here and maybe I didn't emphasize enough was is whatever you're doing necessary for foundation business. Right? So if it's a hotel, you have to ask yourself, what is the hotel for? So did you go there for foundation business? Did you get the king suite or did you get, you know, just just a regular room? So that kinda goes to reasonableness as well, which is another factor here. But in terms of the self dealing piece, first question is, was it necessary for foundation business? So if there was an important board meeting, you had to travel to Florida, the meeting was only in person, then, yes, it may have been reasonable and necessary to get a hotel room in Florida at a reasonable rate. That might be something you could get reimbursed for under the exception. But in many cases, if you have this kind of ongoing account where there's personal hotel expenses that are commingled with the foundation business expenses, then, yes, that could definitely be self dealing that you have to take a closer look at. Perfect. Thank you. The next the next question that came up is is more of, like, the definition of a disqualified person. Right? So if a person has the authority or the ability to sign checks but does not have voting ability within the foundation, are they considered disqualified person? That's a great question. I would say generally yes because in many cases, we have officers who are not voting directors who may have signatory ability, and it really goes to control rather than someone's particular title or voting rights. So, basically, if the IRS could deem you to have control over the organization and and that's a little bit loosely defined at times, and I would say signatory authority would be definitely a form of control over the bank account, then I would say most likely they would be considered a disqualified person with respect to the foundation. Perfect. Thank you. I think you might have covered this one, but it doesn't hurt to reiterate. But if a disqualified person gets paid for performing services, is that exempt? I did cover it a little bit, but there there are nuances which we should go over again. So there are a number of elements to the payment. So first of all, the key question is, is it necessary? Right? What are they getting paid for? So if your disqualified person is an employee who's doing necessary services for the foundation, so maybe they're a program manager that's implementing charitable programs. Maybe you're an operating foundation even in this this applies. Right? So, yeah. So in some cases, they they are necessary. You really need that person to be involved to implement your programs or your grant making. Then that may fall in an exception. But you're still asking yourself you're still gonna have to go over all those conflict of interest rules. Right? So you're gonna have to think about, a, who is this person? Right? If they're a family member, do they have the requisite skills to do this well? The rest of the board would have to approve that independently of that person. So they'd have to think about, a, is this the right person? Have we looked at comparable salaries? Have we looked at other options for the position and their expertise? So I would say all those rules apply. So, yes, it it could be an exception, but it also could be a self dealing transaction depending on on the particulars there. Perfect. And I think, unfortunately, we only have time for one more, but, obviously, if we have not gotten to to your question that you've submitted, we'll make sure we follow-up after. How should a foundation document the decision process for deciding, if there is a a self dealing exception? I think that's a great question, and I think proper documentation is actually a great way to kind of get upfront of these issues. And there are a number of ways you can do it. So I have a few suggestions, and this isn't the only way to do it. It's just just a thought process. So a number of things. So number one, it could be codified in the conflict of interest policy for the organization. For our clients, we actually have a different conflict of interest policy for a private foundation than we do for a public charity. And the reason is the the private foundation conflict of interest policy contains all of those rules that apply to both types of organizations, but it also contains specific provisions on self dealing. And we also include that in our conflict of interest disclosure form for private foundations, meaning that there are different disclosures or extra disclosures that you might have to make as a director, officer, or a key employee of a private foundation where maybe you wouldn't make all those disclosures, if you are just working for a public charity. So, that's one place it can be codified. Another place might just be a board orientation where you're really going over these rules in advance, and you have perhaps a handbook for your trustees, to kinda get them onboarded and understanding of these rules. So those are a couple of suggestions, but there are a number of places where you could put this this guidance for sure. Perfect. Well, thank you very much, Valerie, for for taking the time to go through the slides and also answer a few questions, while you could. Thank you so much, Scott, and thanks for having me. I appreciate it. And, and if anyone has other questions, by the way, I think my contact information is on the next slide, so I'll just, skip on over to that. And then we may actually have a polling question, which I just wanna make sure is is not missed before I turn it over to the next person. So here's my contact information. I know this is a key area for questions. If anyone has any, please feel free to reach out at any time. And here's our here's our polling question. So do you feel comfortable with your knowledge of the self dealing rules and regulations? Yes, no, or c, that's what legal counsel is for. And I'll allow you to take a couple minutes to answer and then turn it over to Tanya and Miranda who's our next speaker. Thanks again. Thank you, Valerie. Now I'm sure some of us are all nervous now and going to check all our compliment interest and give Valerie a call. But, we'll we'll go ahead and turn back to the 990 here. So here on the screen, we have the information about officers, directors, and trustees. So we are required to list every officer, every director that served at least for a day during the year. So if a new member joined the board, we would include the day that they started. If a board member left the board, we would include the last day that they served, on the board. It's also important to note the address that's being used. The IRS requests an address in which they could be contacted. So as Anand mentioned, we never wanna use personal addresses. We always recommend the address of the foundation to be used. We'll also list, how much how many hours per week are being devoted, the amount of compensation, and any benefits that are being received. The same also applies for any employees, paid over over 50,000. The $9.90 is a 100,000, but the still has not been updated. Unfortunately, the threshold is only 50,000. We're also required to disclose any others that are not the top five, and that number will be on the bottom. So if we had, you know, 10 of them over, 50,000, we would list the top five and just let the reader know five others are also paid. It's over 50,000. Then we are required to disclose any contractor that we paid over 50,000. Although us, Otter, love and strive to be on this list, it does not always happen. Most commonly, we will see your investment managers. You will see maybe legal. If you're running a specific program and you brought in consultants, that would also be disclosed here. We are required to disclose the name, the address, the service provided, and the amount paid. A common mistake I see here is sometimes rent will be included here. Rent should not be listed on the highest paid, list. Alright. Summary of the right charitable activities. So this is common for private operating foundations as you are invested in running your own programs. But from time to time, grant making foundations will also run, their own programs. An example of this could be hosting a seminar for your grantees, or maybe hosting a class. And if you do do that, it's nice to let the reader know, hey. You know, we do more than just grant making. Here is what else we have done, and we would list the four highest directorial activities. And this will include the program that you you did, as well as the amount spent to run that direct charitable activity. Not necessarily required for a grant making foundation, but yes for private operating foundation. And on the next slide, we'll actually have examples of interact charitable activity. So here was a public education campaign. This foundation educated the public on the ethical and health impacts of chocolate consumption through brochures. We did try to pick a, a fun a fun topic here as we are in the middle of lunch. And in this activity, they incurred expenses totaling a 173,000. Another example of a direct charitable activity is health impact research. So this foundation funded and published a review on the health effects of chocolate. Now it's important to note that you can see that the foundation is actually involved in this activity, and that's what makes it a direct charitable activity rather than just writing a check for someone else to publish. K. And here we have another third example, supporting programs in in cocoa farming regions to improve labor conditions, also provide trainees, and, you know, ethical sourcing of the chocolate industry. K. We do have a polling question here. Does your foundation have any directorial activities or give out any program related investments? K. With that, let's let's talk about summary of program related investments. So program related investments, the purpose of them is to make them charitable, and they're typically low interest. So when you get that a PRI, the purpose of the PRI is not to really make and make money off of it. They're typically below market market rates, and it's really just to help the organization, for for a period of time. And then this amount does get repaid back to the foundation. And it's important, to note that because the year that you actually make this PRI, you can take this full amount as a qualifying distribution. The year that this is repaid, so once the time the term is up, you receive all of your interest, the money is now being returned to you, it actually increases your payout, which we will see later on. But it's always important to note that, in the beginning, yes, it does benefit you. So we are required to list the PRIs that are given within the year. So if you have some, they're ongoing, they're not being paid for another three or four years, you will not list them here. You only list the ones that are new each year. So here is an example, a a PRI. This was a loan to a farmer owned, cooperative in in land, to be to help with the chocolate production, and this will be expected to be repaid. Alright. So the next few slides are in accountants dream. This is where we get into all of the calculations and really determining how much am I supposed to be giving out. Questions that we always get is, well, you know, I can't predict the future, so what am I supposed to use to determine and budget what what what I'm supposed to be giving out? And we have seen a couple of different, ideas and ways. You know, we've seen foundations who use a 36 rolling average. We'll see a foundation maybe just using prior year. With the market being so unpredictable, foundations have really had a hard time and a challenging time really figuring out and budgeting, how how much to really give out. So let's discuss how to calculate this number. So we first start off with the, average monthly fair value of your securities. So if you have a custodian statement, we'll take all twelve months of those statements. We'll take the beginning of the month, ending of the month, take that average, and then average that whole that whole amount. That also applies to the cash balances. You might have other assets. An example of another asset will be maybe real estate. Real estate isn't required to be appraised every year. You can be it could be appraised every five years. So that amount will be listed as fair value of all other assets. K. That gives us the total fair value. Then there are some reductions. So let's say that you have a reduction for, you know, blockage or other factors. So example of this will be that you have, an investment, and if you were to sell that, it would really, you know, for lack of better words, crash the market. You know, you wouldn't be able to have a reduction in that. Let's say that you one of your assets you purchased using a mortgage, you would reduce that by the amount of your mortgage. So after all those those adjustments oh, and then the IRS is so kind to say, from this fair value, we would determine that 1.5 of your assets is, deemed for charitable activity. So they're not they're kind enough to let us reduce that amount by 1.5%. So the net value of the noncharitable assets is 77,000,000. We then take 5% of that. So based on this information based on this schedule, our minimum investment return is 3,800,000.0. K. So now we know, we calculated based on our average assets, we're supposed to get out 3,800,000.0. Well, we do pay some excise tax. Right? So the IRS allows us to reduce the tax that we're paying, on that investment income that Anand brought us through on page one. So column b, we pay that 1.39%. We see it here again. It reduces the amount that you have to give out. Now, you know, Joe spoke about nine ninety t's. If you file a nine ninety t, you have excise tax on the nine ninety t. You can also, include that here, which also reduces your required payout. So then we come to 3,790,000.00. Now, let's say that you gave out a grant, the grantee didn't use the full amount of the grant, and now the money is returned to you. The money is returned to you. That will increase the amount you have to give out. Let's say someone paid back their PRI. That will also increase the amount you've paid out. That will go on line at four, which in this case was $250,000. So now that will bring us to a total required amount of 4,000,000 to be given out for this period. K. Well, let's figure out how much we gave out. So, and I walk through through page one, column d, and that amount in column d, that 4.7, here we see it again. So that was all of your expenses paid on a cash basis. So money that was actually spent, money that was out the door. Then we can get some PRIs. Those PRIs also go towards meeting your minimum amount, which was the 750,000. Let's say that you decided to, you know, buy office furniture for the whole, the whole office. You are allowed to take the full amount in the year that you pay it. So all of the money that you spend purchasing those assets will also go in the year that you spent that amount as a qualifying distribution. There are some, you know, you could also take some some set asides. Set asides do require prior approval, you know, or if you meet the distribution test, which is if something was going to be a project was gonna be done within five years. We don't see it often. You know, it mostly does require permission. And it's usually an example of this would be, you know, we're gonna be building a museum. It's gonna take ten years. You know, you set aside that amount and take the qualifying distribution. And that's something common, but since this is a detailed review, I just wanna let you know kind of really what it is, what it means. K? So we have a total amount eligible as qualifying distributions to be 5,500,000.0. K. Now on the next page is where we see it all come together. So line one, we see that 4,000,000, which was the amount that we were required to give out. Column c. Let's say that we couldn't put in print to market or we needed to have, you know, another board meeting to give out more grants, etcetera. Let's say that we had undistributed income from 2023. You are allowed to have undistributed income at the end of the year, but it needs to be paid out by the end of the next fiscal year. Now I don't like to say twelve months because let's say that you're in a in a situation where you wanna change your rent or anything like that. You have to consider your undistributed income because it's not that you have twelve months to do it. You have until the end of your next fiscal year. So if you were to have any undistributed income, that would be on line two. K. If you had undistributed income prior to 2023, that would be on line two b. Red flag, we don't want that. That is what is was was taxed on. As Joe mentioned, it starts at 30%, could go up to a 100%. So we do not want to have any numbers on line two. K? Line three a, through e, this is excess distributions. So what this means is that, you know, five years ago, you gave more than your required amount. So here is where we detail how much more you actually gave out. So in total, from twenty nineteen to 2023, this foundation gave excess of 3,800,000.0. K? Line four, we see that number again from the prior page. This is the amount of dollars that go towards meeting your minimum return. So this is all the dollars that are considered qualifying distributions. So the first thing we do is Yaira says, okay. Well, great. You gave up 5.5, but let's say you had undistributed income for 2023. You must first satisfy the 2023 amount and anything remaining as applied to your current requirement to the 2024 amount. In this case, this foundation had access, so all of the distributions that are made in 2024 go towards reducing the requirement for 2024. For this organization, they had to give out 4,000,000. They gave out 5. So they gave out excess of 1,400,000.0. K? So in total, we add that 1,400,000.0 to the other numbers that we had. So in total, 5.3 in excess. What happens is, you can't carry you're only able to carry it, for five years. So 49,000 does get dropped off. So if we go back to the prior slide, the 2019 amount of $49,007.34 gets dropped off. So, you know, I don't like to word the the word to lose it. Right? Because you did something good with that money. It helped. It was charitable. You just wouldn't be able to use it, if you were planning on, you know, you know, strategies or anything like that. So going, so now this foundation has excess distributions totaling 5,300,000, of which 391,000, which we see on line 10 a, will be expired next year. K. Another item to point out, line seven. So sometimes it's it's it's quite common. Sometimes foundations will work together. They'll give out grantees. They'll give out, grants to each other. Maybe one of them is running a specific program, and the foundation wants to be part of it. One thing that, Yaira says is, well, we can have two foundations benefit from it. Right? So what happens is only one foundation can take that qualifying distribution. The foundation taking a qualifying distribution, business as usual, treats it as a grant, then it's a responsibility. The other foundation will actually take the amount out of corpus, which is on line seven. K. And with that, we have a polling question. What type of private foundation is your organization? And, we will now hand this over to Jason, as he will give us the the rundown of private operating foundations. Thank you, Tanya. Thank you for taking us through the calculation, of the distribution requirement for non operating foundations. We're now going to switch gears for a few moments and discuss private operating foundations and the distinctions between non operating and operating. While page nine, which Tanya just brought us through, is probably the most misunderstood or misconstrued page of the return for non operating foundations, the top of page 10 would be its equivalent for operating foundations, as it contains the calculations and tests for meeting and maintaining private operating foundation status. So before we dig into operating foundations, let's take a quick glance at how the top of page 10 would be shown for a non operating foundation. Simply put, part 13 is left blank as it would be not applicable for non operating foundations. And vice versa for an operating foundation, page nine, part 10 part 12, would be left blank as the approximate 5% distribution requirement would not be applicable to an operating foundation. As we'll see, operating foundations are really subject to other requirements and tests. So now let's discuss the distinctions between operating and non operating foundations and some of the benefits of operating foundation status. An Operating Foundation is a private foundation that devotes most of its resources to the active conduct of its exempt activities. To qualify as an Operating Foundation, the organization must operate one or more travel, programs or activities and meet certain tests, which, again, we'll go over shortly. Note that this does not preclude it from conducting grant making activities as some foundations choose to act in a hybrid manner where they conduct, both programs and activities and give out grants. But in most cases, grants do not count towards meeting an operating foundation's tests. Thus, grants, grant making is not a typical activity, or significant activity of an operating foundation. Typical examples of private, sorry, typical examples of programs and activities that would qualify as an, active conduct, of a private operating foundation. You think of, you know, operating a museum, running a performing arts center, conducting medical research, or running an art lending programs. Those are some of the the typical examples we would see. Well, generally speaking, most of the rules, I. E. Those self dealing rules, etcetera, are the same for both non operating and operating foundations alike. There are some benefits to operating foundation status. Some of the benefits afforded to an operating foundation are, one, that it is providing more generous deductibility limits for its donors, similar to those, afforded to public charities. This can be really important for a foundation that is still fundraising or soliciting contributions. Another benefit, would you know, a second benefit would be often an operating foundation's annual distribution requirement is lower, I it's not really, subject to that approximate 5% distribution requirement of a non operating foundation. And as we go through the test, you'll you'll kinda see how that that plays out. A third benefit, afforded to an operating foundation is that some operating foundations may claim exemption from the excise tax on net investment income if they meet certain criteria. Only a very small number of organizations meet this exemption, but, nevertheless, it's really a benefit. These organizations are called exempt operating foundations. And out of all the foundations in in, in existence, again, very, very small very, very small percentage would would meet those requirements, probably less than 1% probably of private, operating foundations. And then the the last benefit is that operating foundations are eligible to receive qualifying distributions from other private foundations. So let's move on to the next slide, where we where we start to really to delve into, the tests and how a private foundation would, would qualify. Well, as mentioned earlier, an organization must make qualifying distributions directly for the active conduct of its exempt activities. It simply cannot give out grants to other organizations. And it must meet two tests, the income test and one of three alternative tests, the asset test, the endowment test, and or the support test. The tests are applied each year and must be passed either via via the three out of four year method or via the four year combination method. So now let's discuss the tests. The income test. To satisfy the income test, a foundation must make qualifying distributions, again, directly for the active conduct of its activities, equal to substantially all, which is defined by the IRS as 85%, of the lesser of its adjusted net income or its minimum investment return. And I'll discuss calculating, adjusted net income in a minute. Tanya already dis, discussed minimum investment return, but we have yet to really discuss adjusted net income. And we'll we have an example of that. In addition to the income test, again, it must meet one of three alternative tests. The asset test, generally speaking, for the asset test to be satisfied substantially more than half, again, defined by the IRS as 65% of the foundation's fair market value of its assets must be devoted directly to its exempt functions. Think of your museums here. They have large buildings and priceless artwork that primarily make up their assets and which are used directly for their exempt function. For the endowment test, a foundation must make qualifying distributions, again, directly for its exempt function, in an amount not less than two thirds of its minimum investment return. This is the test where we often see, being used for operating foundations, that really don't have a significant asset base. And, again, it's the most often used test out of the three. For the the support test, generally speaking, again, substantially all of the foundation support must, normally be received from the general public and five or more exempt organizations, which are not private foundations. So those are the tests. Again, brief overview of each one. So now that we've defined the tests, there really is one final item that we have to define, and that is the adjusted net income. And Anand kinda mentioned it earlier, but as it's not really applicable to, a private non operating foundation, we kinda glossed over it. So generally speaking, adjusted net income includes all net income except for long term capital gains, and it includes tax exempt income, which is, you know, interest from exempt bonds, as well as income and expenses from charitable functions, and fundraising. It does not include contributions, and it is important to note that adjusted net income also includes certain income modifications, line nine. A common income modification we see, are amounts. Sorry, our amounts that were taken as qualifying distributions in a prior year. Think of a building that that was taken as a qualifying distribution in the in the prior year then sold in the current year, that would be an income modification. So, so let's take a look a look at, again, some of the the the expenses, that are also applicable to the net, net adjusted income. You can take any of your investment, related expenses against that as well as any, you know, any, exempt income related expenses. So if you're generating, you know, you have a program and that that that program generates income, any expenses against that income could also be applied to calculate your net adjusted, income. Okay. So let let's look at let look at a example, of how the tests kinda play out here. And we see the the income test. We see the three three, alternative tests. And on line two a, that's where we take either the adjusted net income or the minimum investment return, again, whichever is, a lesser. We take 85% of that amount. So in our example here, that's 467,000. The foundation made qualifying distributions of about 3,100,000.0. Out of that amount, amounts that were not used directly for the active conduct of exempt activities, this 150,000, leaving us with qualifying distributions made directly for active conduct of $3,000,000. So that $3,000,000 is greater than 467,000. So this foundation does meet the, income test in the current year. And then we see down below on line three, those alternative tests, the asset, alternative test, the endowment test, and the support test. In our example here, we have the endowment alternative test, being used, which is two thirds of the minimum investment return. So, again, the 3,000,000 on line two e is greater than 831,000. Okay. So I I know that's probably a a a lot to to pack into, you know, a seven minute, presentation. But just one final note, you know, is what happens if you fail to meet the tests? Either the three out of four year method or via the four year combination method. If you fail to meet the test, you simply default to a non operating foundation. So it's not like you you lose your exempt, organization status. You simply default to a non operating foundation. So that concludes our sidebar on private operating foundations. We're now gonna kinda switch back to our original example, or original, return. And we see in on the bottom of page 10 and continuing on to page 11, some some some some, supplementary information. This supplementary information includes, information regarding your foundation managers, information regarding contributions, grants, and programs, and also includes a listing of your grants paid during the year or approved for future payment. So if we take a brief look at the information regarding foundation managers, there's two questions here. One is regarding your substantial contributors who are also managers of the foundation. You're required to list any of those, on line one a. And then on line one b, that would include any, any foundation manager or, some, substantial contributor, that owns 10% or more of, investment, but the foundation also owns a position in. Question two, is information regarding contributions, grants, gifts, loans, scholarships, etcetera, programs. This is where you would you would list any information that you where you would want to receive, solicitation, for, from the general public or from potential grantees. We typically recommend that you check the box, if your foundation only makes contributions to preselected charitable organizations as you don't really wanna be inundated, with requests from the general public. But if you do request information, again, this is this is the place to put it. You can also you can also, reference your website if you include the information on your website. Definitely a great area, for potential grantees to look at, in order to to make that, to to really solicit from the foundation. On the next slide, we see, a sample of the list of foundation managers. Again, if your foundation managers, are also substantial contributors, you wanna list them here. That brings us to page 11. Page 11, again, is supplementary information, but this is where you would list all your grantees. You're you're required to list not only the grantee's name, but their address. You also have to include if any if it is an if you do give to an individual, whether there's any relationship to any foundation or substantial contributor. The foundation status of recipient. This is a very important column, because it often, dictates whether you're conducting expenditure responsibility and you're answering other questions on a return correctly. You'll see we have a number of different codes here. NC is, not otherwise classified. This could be a a foreign grantee that you're not, that you haven't conducted an equivalency determination for. But in this case, if you conducted expenditure responsibility, that would be an acceptable, grant and and not be a taxable expenditure. You'd also list, GOV. GOV is a governmental agency or or entity. Other common codes, EOF stands for exempt operating foundation. PC, of course, is your public charities. And then there's also private foundation. Again, depending upon the coding and and the type of organization, there may be expenditure responsibility that has to be conducted or an equivalency determination if if that grantee is is a form entity. The bottom of page, 11, is where you would list any approved for future payment grants. Often, this section should if you're on a cool basis, would mirror your grants payable. But regardless, if you're on a cash basis or a modified cash basis, but if, you still have approved grants, you you should list them here as well. Page 12, is an analysis of income producing activities. Really, this this should mirror page one, column a of your of your nine ninety It reports the income broken out, between unrelated business income. That's columns a and b. Column c and d is excluded by section five twelve, five thirteen, or five fourteen under the internal revenue code. This should really be your your, your income, your net investment income amounts. And then column e is your related or exempt function income. This is where you would list those those program, income amounts or your tax exempt, income, your your, bonds, state of municipal bond interest. That would also be listed in this column. And it's important to note that anything listed in column e, would require a statement, which we'll see on the, on the on the next slide. And then last item to note on this page is your unrelated business income. This is what, if you do have any amounts that are unrelated business income, it would also be reported on your form nine ninety t. This should nevertheless, really mirror the nine ninety t. K. We do have a a CPE question, which has now been launched. Does your foundation have unrelated business income? Yes or no? And then as I mentioned, again, if you have any, related or exempt function income that's reported in column a, on the top portion of page 12, you'd have to just, include a description of how that income really relates, to the foundation's exempt purpose. And we do have two examples here, educating the public on responsible, responsible consumer behavior, promoting awareness of labor rights, etcetera. Line four, that would be that state and municipal bond interest that's excluded, from your net investment income. So that's disclosed here as well. That brings us to the top of page 13 of the return. If the foundation had any, transactions or transfers or relationship with a non charitable exempt organization, you have to disclose that. What is a non charitable exempt organization? Well, that's anything other than a five zero one c three. So if you if you have transactions with a five zero one c seven, your your private clubs, a five zero one c eight, your chambers of commerce, five zero one c 19, veterans organizations. If you had any transactions or transfers with those organizations, you would disclose those, here, as well. We have a statement, which, again, describes the transactions with those noncharitable ex noncharitable exempt organizations as well as some additional again, some additional disclosures here, towards the, towards the middle of page 13. And finally, we have the signature section of the return. Really, this section has gone by the wayside with electronic filing, as there is, a separate form, form eighty eight seventy nine t e, which acts as the signature page. And, nevertheless, this section should be, filled out, with the paid preparer's information, and include, if it is if it isn't a self employed tax preparer, the firm's information, firm's number, etcetera. So that brings us through my section of the presentation. I'll now pass it over to Michael Konik. Thank you, Jason. I'm not gonna turn, my the attention to the some some common errors. We we go we we normally find on a tax return. There's not a week that goes by, where we don't, where we were asked to review a return, and and we find a lot of these common errors, included. So I just wanna highlight a few. The first one, pay this page is gonna concentrate mostly on page one of the return. Part j accounting method, unless your foundation is on a cash basis, on page two of the return, items like accounts payable, accounts receivable, prepaid expenses really shouldn't be shown as those are non cash transactions. So, one other item is the the other box should be checked if your foundation is on the modified cash basis. Part one, column a, the the nine ninety p f, column a, should be prepared in the same accounting method as your books and records. The two should reflect one another. Part one column b, net investment income. Only expenses that are directly related to the, to the managing and and cultivation of investment income, should be included here. Part one, line c, net net adjusted net income. Unless you're approved specifically by the IRS to be a a operating foundation, no information should be included in column c. Part one, column d, disbursements for charitable purposes, My colleagues went over this earlier. Should only be cash basis expenses, the expenses that were paid out, during the year. And and and if you're registered on an accrual basis, there might be, some differences between column a and d, depending on when the cash actually was paid out. Continuing with page one of the return, the analysis of revenue and expenses. As I mentioned earlier, it's normally on a cash basis. So any anything like in kind or pro bono with the services received by the foundation would not be shown on the tax return. And, again, this might differ from your audited financial statements if you're on, accrual basis or modified cash basis. If you're not required to attach a schedule b to the tax return, the box should be checked, that you're not required. Otherwise, it could be deemed incomplete. Net gain, part one, line six a, net gain on loss of sale of assets. Capital gain dividends should be broken out separately, from dividends and interest as capital losses could be used to offset some of these capital gains. Part one, line six b, total investment assets should be listed on on line six a. It was discussed earlier, part one line 15, pension plans, employee benefits, that the instructions specifically state that payroll taxes should be included on this line. And then moving on to page two of the return. We we notice a lot of times investments don't include, the required amount of shares, a description of the individual investments held, and the book value and the market value. So all this information should be included on a line by line basis except for some government securities. Part three, analysis of changes in net assets. For for those of you who file accrual or modified cash, realized gains and losses should be reported here. Obviously, not the case of your if your returns on a cash basis. Page three of the all all sales information related to publicly traded securities are actually allowed to be combined onto one line on on the return. A lot of times we see the full detail of each sale that occurred throughout the year, but this is not necessary. It can all be condensed into one line item. And then page four, the return. If there are any changes to your articles of incorporation or bylaws, these have to be specifically included with your return, and that box on line three has to be checked off. Just letting the the IRS know, that there's been a change and that you're reporting it to them. And and this should occur in the year in which that adoption is made, the change adoption adoption. Moving on to page five of the return. Many foundations do not click, the self dealing box for any compensation to officers or reimbursements of expenses to disqualified individuals. We highly recommend as a conservative approach for that box to be checked off. And then page six of the return, a lot of times we we notice there's not expenditure responsibility disclosures being made on the trustees listing. We know, as mentioned earlier, home addresses are being used and personal contact information. Again, the IRS prefers, the business of the foundation or PO box. And on on part seven, line two, we noticed that that other employees that are paid over 5 50,000 that are not included in that that top five list, are not included. There's a number there which should be included for anybody above in addition above, $50. On the page seven, one item we that that is often left off is the invest fees paid to investment advisers. They're considered independent contractors and should be listed as such, if the total, payment to them is 50,000 in the calendar year. Summary of direct travel activities. This is really a a great place where the foundation can list all the good work it's doing with its programs, where they hold in convenings or conferences. A lot of times we, foundations don't take the opportunity to really flush out that section and describe the good work they're doing outside their grant making programs. On page eight, any any let's say you gave out a grant and it's paid back the next year. You took a distribution in one year, it's paid back the next year. You're required to show that amount received back as an adjustment to the minimum distribution requirement. Part part 11, line two, as as Tanya mentioned, any amounts paid to acquire charitable use assets, should be added back here as well. Page 11 and into the next page, page 12. For any grants paid during the current year and any grants payable, we often see that the grantee, is missing you know, the address is incomplete, the recipient code is not listed or the actual grant purpose is either incorrect or not included. And we wanted to highlight these even though we went over them, throughout the presentation just because any one of these items could could, you know, maybe lead to the the return being deemed incomplete. And so we wanna make sure, all our foundations, are are are are are completing their returns in in accordance with the IRS instructions. Scott, did you wanna take it away for some quick questions? Yes. So, Mike, I think I think we have one more polling question to get in there in case somebody missed one. So if we can go to that. So as you can see, I mean, we could probably go on with this webinar for several more hours to kinda talk about the intricacies and and just the the various areas to to be aware of. This is really a a topic that we're very passionate about and wanna make sure that everybody truly understands. A few questions came in. Obviously, you know, we are light on time right now. One of the questions that came in were what are the most common circumstances, mistakes, or fraud that private foundations make that trigger, audits by the IRS. And, you know, I'd probably take that one and and just say it's really those areas that we've highlighted that that Michael just highlighted from slides 93 to 98 that typically we see, answered incorrectly or or inappropriately, I should say, that can trigger those those audits by the IRS. So things to to be aware of. And, obviously, if you have any further questions on that, just feel free to reach out to any one of us, and, and we can help you out with that. There are a couple other questions for Valerie. I know she's not on the the call anymore, so we'll make sure that those are distributed to her. But, you know, just wanted to thank everybody as we did hit 2PM and and I'm sure everybody's hungry if you have not grabbed lunch during this. But I just wanna thank everybody for joining us today. We truly appreciate you all taking the time to be part of this important webinar and this understanding and education of the form nine ninety also big thank you to all of our speakers, internally and externally. Thank you for sharing your insights and expertise. Contributions made this very engaging and and valuable for for all that attended. And then, of course, just a a a big thank you to Philanthropy Massachusetts and and Alex for cosponsoring, today's webinar with us. The partnership and support that you show us is is instrumental to helping us bring these conversations to life with our, private foundation community. So we hope everybody found this informative and inspiring. Thanks again, and, and we look forward to continuing our conversations with you. Thanks, Scott. Thank you again for our speakers and thank you everyone for attending. If you have not already completed it, we have one full survey located in the survey tab of your panel. A reminder, a copy of PowerPoint slides recording of today's webinar will be made available to attendees via email, four business days post event. If you are interested for CV credits, CV certificates will be issued within eight to ten days via email. Thank you again, and have a great rest of your day.