A.1. Computing Section 4940 Tax on Taxable Private Foundations

(1) The tax on taxable private foundations is equal to the amount, if any, by which the

sum of the 1.39% tax on investment income, computed as if the foundation were exempt from taxation under Section 501(a) for the taxable year, plus the amount of unrelated business income tax which would have been imposed for such taxable year if the foundation had been exempt from taxation under Section 501(a), exceeds the tax imposed under subtitle A on such foundation for the taxable year.

(2) Stated otherwise, if the sum of the 1.39% excise tax on investment income and

the tax on unrelated business income (applied to a taxable private foundation as if it were exempt) exceeds the regular income tax, then the taxable private foundation must pay the amount of this excess. This ensures a private foundation can’t reduce its tax liability by losing its exempt status. The tax is paid annually at the time the organization is required to pay income taxes imposed under subtitle A.