Guide · Private Foundations
Private Foundation Excise Tax on Net Investment Income
A practical walkthrough of the Section 4940 excise tax: what counts as net investment income, the current rate, and how it flows onto Form 990-PF.
October 21, 2025 · 7 min read
Domestic private foundations are generally subject to an excise tax on net investment income under Section 4940. The tax is reported on Form 990-PF and is one of the most common areas of confusion for foundations preparing their first few returns.
What is included in net investment income
Net investment income generally combines gross investment income with capital gain net income, reduced by ordinary and necessary expenses paid to produce that income.
- Interest, dividends, rents and royalties
- Capital gain net income from the sale of investment assets
- Allocable expenses such as investment management and custodial fees
Rate and reporting
The excise tax applies at a flat 1.39% rate for tax years beginning after December 20, 2019. Foundations may also owe estimated tax payments during the year where the liability is expected to be significant.
Common pitfalls
Expense allocation between charitable and investment activity is often where returns go wrong. Foundations also frequently overlook that capital losses cannot be carried back or forward for this purpose.
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