The 5% payout: what a private foundation owes, and when.
A year's amount is computed on one return and due by the end of the next tax year. Here is the arithmetic in the form's own order, the date, the carryover, and what the filed returns show.
A description of the statute, the regulation and the form. Not tax or legal advice.
Four parts of the form, in order.
Part IX: Minimum investment return
The average fair market value of the assets not used directly for charitable purposes, less acquisition indebtedness, less 1.5% deemed held as cash for charitable activities. Five percent of what remains is the minimum investment return, prorated by days in a short year.
Part X: Distributable amount
The minimum investment return, less the excise tax on net investment income (1.39%) and any income tax for the year, plus recoveries of amounts once counted as qualifying distributions. This is the year's amount.
Part XI: Qualifying distributions
What was paid out for charitable purposes in the year: grants, the reasonable expenses of making them, assets acquired for charitable use, program-related investments and approved set-asides.
Part XII: Undistributed income and the carryover
The year's distributions are applied first to the prior year's amount still open, then to the current year's. What is left of the current year's amount is undistributed income, due by the end of next year. What exceeds it is an excess, carried forward up to five years.
Owed and dated, not late until the date passes.
The due date
After the date
An excess
Who it covers
Most of the arithmetic agrees. The date is what a return cannot hold.
Totals from the 990-PF study and the carryover-chain study; no foundation is named. Each count is on the measure its study states.
Where each rule is written.
The statute
The regulation
The form
What is the 5% payout rule for a private foundation?
Section 4942 of the Internal Revenue Code sets a distributable amount for each tax year of a private non-operating foundation: 5% of the average fair market value of its assets not used directly for charitable purposes (the minimum investment return), less the year's excise and income taxes. That amount is to be paid out in qualifying distributions by the end of the following tax year.
When is a year's payout due?
By the last day of the tax year after the one it was computed for. For a calendar-year foundation, the 2025 distributable amount is due by 31 December 2026. An amount still to be paid during that following year is owed and dated; it is not late until the date passes.
What happens if the amount is not paid out by the date?
The statute sets an initial tax of 30% on the income still undistributed at the start of the second tax year after the one it belongs to, and a further tax of 100% on what is still undistributed when the correction period closes. Whether a tax applies to a particular foundation is a question for its counsel and its preparer, not for this page.
What counts as a qualifying distribution?
Grants and other amounts paid to accomplish charitable purposes, the reasonable administrative expenses of doing so, amounts paid to acquire assets used directly for charitable purposes, program-related investments, and set-asides the IRS has approved or that meet the cash-distribution test. Part XI of Form 990-PF totals them.
What happens when a foundation pays out more than the amount?
The excess carries forward and can be applied against the distributable amount of the next five tax years. What is not used by the fifth year lapses with that year's return. Part XII of the form tracks each year's excess separately.
How is a short tax year handled?
The 5% is prorated by the number of days in the short year. The Treasury regulation divides by 365; the form's instructions divide by 366 in a leap year. Both are official, and the two give different figures on line 6 of Part IX.
Does the rule apply to every private foundation?
It applies to private non-operating foundations. A private operating foundation, which spends its income directly on its own charitable activities under a separate test, is not subject to the section 4942 tax.
Your foundation's own amount and date, from its filed return.
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For the firm that prepares the return: the pre-filing check.