Speak directly with a 412 Split Funded Defined Benefit Plan Advisor CALL - TOLL FREE - 800-433-9667 NOW!

OR  Click Here  to provide your phone number
and best time for our 412 Split Funded Defined Benefit Plan Advisor to call you.

Private Operating Foundation - Income Test

Income test. To qualify as an operating foundation, the organization must make qualifying distributions directly for the active conduct of its exempt activities equal to substantially all (at least 85%) of the lesser of its:

1. Adjusted net income (below), or
2. Minimum investment return,

If a private foundation's qualifying distributions exceed its minimum investment return for the tax year, but are less than its adjusted net income, substantially all of the total qualified distributions must be made directly for the active conduct of the foundation's exempt activities. However, if the foundation's minimum investment return is less than its adjusted net income and its qualified distributions equal or exceed the adjusted net income, only that part of the qualified distributions equal to substantially all of the foundation's adjusted net income must be made directly for the active conduct of the foundation's exempt activities.

Adjusted net income is the excess of gross income for the tax year (including gross income from any unrelated trade or business) determined with certain modifications (described later) over the total deductions (including deductions directly connected with carrying on any unrelated trade or business) that would be allowed a taxable corporation determined with certain deduction modifications (described below).

Gross income does not include gifts, grants, or contributions received by the private operating foundation but does include income from a functionally-related business. Gross income and the total deductions allowable from that income will be figured as they are normally figured for income tax purposes except as otherwise provided. For figuring adjusted net income, there will be no exclusions, deductions, or credits unless provided under Income modifications and Deduction modifications (below).

Amounts received by the foundation in tax years beginning after 1969 representing repay¬ment of principal on loans made in tax years before 1970 are not includible in gross income. However, payments of interest on those loans are includible in gross income.

Income modifications

1. Interest on government obligations normally excluded under section 103 of the Code is included in gross income.
2. When reporting capital gains and losses from the sale or other disposition of property, only net short-term capital gains are included in gross income. Long-term capital gains or losses are not included. Neither are net section 1231 gains included. But net section 1231 losses may be included in the computation if the losses are otherwise deductible under these rules. Any net short-term capital loss may not be deducted for the year in which it occurs. This loss may not be carried back or carried over to earlier or later tax years regardless of whether the foundation is a corporation or a trust. Capital gain dividends received from a regulated investment company are excluded from the foundation's adjusted net income.
3. Gross income includes:
   a. Amounts received or accrued as repayments of amounts taken into account as qualifying distributions for any tax year,
   b. Amounts received or accrued from the sale or other disposition of property to the extent that the acquisition of the property was considered a qualifying distribution for any tax year, and
   c. Any amount set aside for a specific project (see Set-asides, in Chapter VII) to the extent the amount set aside was not necessary for the purposes for which it was set aside.
   
4. The excess of fair market value on the date of distribution over adjusted basis of property distributed to a state, a U.S. possession, or any political subdivision thereof, the United States, or the District of Columbia for public purposes, or to a charitable trust or corporation, will not be included in gross income.
5. The income received from an estate during the administration period will not be in¬cluded in the operating foundation's gross income. However, if the estate is consid¬ered terminated for income tax purposes because of a prolonged administration pe¬riod, the income will be included in gross income.

For purposes of item 2, in determining gain from the sale or other disposition of property, adjusted basis will be the greater of:

1. The fair market value of the property on December 31,1969, plus or minus all ad¬justments to basis after 1969, using straight line depreciation and cost depletion, if the foundation held the property on December 31, 1969, and continuously thereafter to the date of sale or disposition, or
2. Adjusted basis as normally determined using straight line depreciation or cost deple¬tion.

For determining loss from a sale or other disposition of property, the adjusted basis as normally determined using straight-line depreciation or cost depletion will apply.

Example. The Morgan Foundation bought unimproved land in January 1969, for $102,000. On December 31, 1969, the fair market value of the property was $110,000 and the adjusted basis was still $102,000. The property was sold on January 2, 1983, for $105,000. Because the fair market value on December 31, 1969, was greater than the adjusted basis, the fair market value is the adjusted basis used to determine gain. However, because the adjusted basis for determining gain, $110,000, was greater than the sale price, there was no gain. Moreover, because the adjusted basis for determining loss, $102,000, was less than the sale price, there was no loss.

Deduction modifications. Deductions generally are limited to ordinary and necessary expenses paid or incurred for the production or collection of gross income, or for the manage¬ment, conservation, or maintenance of property held for the production of income. These ex¬penses include the part of a private foundation's operating expenses paid or incurred for the production or collection of gross income. Operating expenses include compensation of officers, other salaries and wages of employees, interest, rent, and taxes.

When only part of the property is income producing or held for the production of income subject to the provisions of section 4942 and the remainder is used for exempt purposes, the allowable deductions must be divided between exempt and nonexempt uses.

If the expenses for property used for exempt purposes are more than the income received from the property, the excess may not be deducted.

Allowances for straight line depreciation and depletion (other than percentage depletion) are deductible. Deductions will be allowed for expenses and interest paid or incurred to carry tax-exempt obligations. However, no deduction will be allowed for amounts not paid or incurred for purposes described earlier. For example, there will be no deduction for:

1. Charitable contributions,
2. Net operating losses, and
3. The special deductions for corporations