What is the 4942 tax on the distributable amount in Form-990 PF?
6.2k views | Last modified 12/28/2022 1:35:04 AM EST |

Applicable To
990-PF 990-N 990-EZ 990 8868 1120-POL

Private foundations that file Form 990-PF are subjected to a 4942 tax on the distributable amount if the foundation has undistributed income. The foundations not subjected to a 4942 tax on the distributable amount qualify for a reduced tax of 1% on the net investment income instead of 2% under section 4940(e).
The undistributed income is considered the distributable amount of the foundation without the qualifying distributions for the tax year. A qualifying distribution is any amount that a foundation uses to carry out a charitable purpose or buy an asset used for a charitable purpose.
For example, X is a private foundation that has allocated $5,000 to charitable purposes. X has spent only $3000 for charitable purposes, and the remaining $2000 is undistributed income. X will be subjected to an excise tax of 2% of its investment income if X has undistributed income.
If X spent $5000 completely on charitable purposes, the excise tax based on its investment income for X would be 1% of its investment income.
So, suppose a foundation has any income from the distributable amount not used for charitable purposes. In that case, that income is called undistributed income, and the foundation will be subjected to a 4942 tax on the distributable amount.
Here's how you can find out your 1% of tax on investment income in Form 990-PF using Tax990: 

  1. Log into your Tax990 account
  2. On the dashboard, click on the "Start New Return" button. 
  3. Select the "Tax Year" and "Form 990-PF" options on the list of Federal returns. 
  4. Enter your organization details and click "Next."
  5. On the "Organization Tax Year" page, select the tax year calendar or fiscal for which you want to file the information return. 
  6. Once done, the subsequent steps will be to fill the actual parts of the form. 
  7. Under "Qualification Under Section 4940(e)", select whether your foundation is liable for the section 4942 tax on the distributable amount. 
  8. Enter your foundation's "Adjusted Qualifying Distributions" and "Net Value of Noncharitable-Use Assets" for each tax year.
  9. Click Next and follow the subsequent steps as prompted. 
  10. Review the details, Pay, and click the Transmit button to transmit your return to the IRS. 

Your foundation's 1% tax investment income will be automatically calculated once you enter the values. 
Note: You do not have to complete this section if your foundation is subjected to a 4942 tax on the distributable amount.

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