IRS Publication 5580 – IRS Form, Instructions, Pubs 2026

IRS Publication 5580 – Private foundations must navigate complex excise tax rules under Chapter 42 of the Internal Revenue Code. IRS Publication 5580 (Exempt Organizations Technical Guide TG 57) serves as the authoritative IRS resource for understanding the Section 4940 tax on net investment income.

Revised in August 2024 (Pub. 5580, Rev. 8-2024), this technical guide explains the 1.39% excise tax that applies to most domestic private foundations. It details calculations, allowable deductions, capital gains treatment, exceptions, and compliance steps for Form 990-PF reporting.

Whether you manage a grant-making foundation, serve as a trustee, or advise exempt organizations, this guide breaks down Publication 5580 in clear, practical terms using official IRS sources.

What Is IRS Publication 5580 (TG 57)?

Publication 5580 is an Exempt Organizations Technical Guide designed primarily for IRS examiners but invaluable for private foundation administrators and tax professionals. It covers the excise tax imposed under IRC Section 4940 on net investment income of:

  • Tax-exempt private foundations (under Section 501(c)(3) that do not qualify as public charities under Section 509(a)).
  • Taxable private foundations (those without 501(a) exemption, e.g., due to governing instrument issues under Section 508(e)).
  • Section 4947(a)(1) trusts treated as private foundations.

Key facts about the publication:

  • Revision date: August 1, 2024.
  • Catalog Number: 73347O.
  • Download the full PDF: https://www.irs.gov/pub/irs-pdf/p5580.pdf.
  • It is not an official pronouncement of law but provides detailed technical guidance current through its revision date.

The guide addresses computation methods, historical reductions (now repealed), examination techniques, and real-world examples.

Who Must Pay the Section 4940 Excise Tax?

Most domestic tax-exempt private foundations pay a flat 1.39% tax on net investment income for tax years beginning after December 20, 2019 (Taxpayer Certainty and Disaster Tax Relief Act of 2019).

Exemptions:

  • Exempt operating foundations (under Section 4940(d)) pay 0% if they meet strict criteria (operating foundation status under 4942(j)(3), 10+ years of public support, independent governance) and obtain an IRS determination letter. Attach the letter to the first Form 990-PF claiming the exemption.
  • Foreign exempt private foundations face a separate 4% tax on gross investment income from U.S. sources (Section 4948(a)) instead of Section 4940.

Taxable (nonexempt) private foundations compute the tax differently under Section 4940(b): It is the excess (if any) of [1.39% tax on net investment income + hypothetical Section 511 UBTI tax] over the foundation’s regular Subtitle A income tax liability.

Note: The pre-2020 2% rate (reducible to 1% for high qualifying distributions) no longer applies. Section 4940(e) was repealed.

Understanding Net Investment Income Under Section 4940

Net investment income = Gross investment income + Capital gain net income − Allowable deductions (Section 4940(c)(1)).

Calculations generally follow Subtitle A (income tax) rules unless modified by Section 4940 or regulations.

1. Gross Investment Income (Section 4940(c)(2))

Includes:

  • Interest (e.g., on loans, bonds, savings).
  • Dividends.
  • Rents and royalties (including overriding royalties).
  • Payments with respect to securities loans (Section 512(a)(5)).
  • Other similar investment sources.

Exclusions:

  • Income already taxed under Section 511 (unrelated business taxable income).
  • Certain income from Section 4947 trusts or estates.
  • Specific non-dividend distributions in stock redemptions by disqualified persons (if conditions in Treas. Reg. 53.4940-1(d)(3) are met).

2. Capital Gain Net Income (Section 4940(c)(4))

  • Includes all realized capital gains and losses from investment property (no carryovers or carrybacks allowed).
  • Losses offset only current-year gains.
  • Special basis rules for property held on December 31, 1969: For gains, use the greater of FMV on 12/31/1969 (adjusted) or adjusted cost basis. For losses, use adjusted cost basis (subject to depreciation/depletion modifications).
  • Gifts of investment property are generally treated as held for investment.
  • Exceptions: Like-kind exchanges of exempt-use property or certain qualifying distributions.

3. Allowable Deductions (Section 4940(c)(3))

Ordinary and necessary expenses directly connected to producing gross investment income or managing investment property, including:

  • Allocable portions of compensation, professional fees, interest, rent, and taxes.
  • Straight-line depreciation (not accelerated) and cost depletion (not percentage depletion).

Deductions NOT allowed:

  • The Section 4940 tax itself.
  • Charitable contributions (Sections 170 or 642(c)).
  • Net operating losses (Section 172).
  • Special corporate deductions (Subchapter B, Part VIII).
  • Section 965(c) deductions.

Expenses must be reasonably allocated between investment and exempt activities (see court cases like Julia R. & Estelle L. Foundation).

How to Calculate and Report the Section 4940 Tax?

Step-by-step formula (for tax-exempt foundations):

  1. Compute gross investment income.
  2. Add capital gain net income.
  3. Subtract allowable deductions → Net investment income.
  4. Multiply by 1.39% (0.0139).

Report on Form 990-PF, Part VI (Excise Tax Based on Investment Income). Pay with the return; estimated tax payments may apply.

Taxable foundations follow the excess computation in Section 4940(b) and Treas. Reg. 53.4940-1(b).

Private foundations file Form 990-PF electronically (for years beginning after July 2, 2019). Use current 2025 instructions for line-by-line guidance.

Examples from IRS Publication 5580

  • Taxable foundation example: Subtitle A tax = $10,000. Hypothetical exempt taxes (4940 + 511) = $11,000 → Section 4940 tax = $1,000.
  • Capital gain basis example: Property with 1969 FMV $100,000 (adjusted) vs. cost basis $102,000 (depreciated to $96,900). Sold for $100,000 → $3,100 gain (greater basis used).
  • Current 1.39% rate worksheet: Exhibit 2 in Pub. 5580 shows full computation for modern filings.

Common Examination Issues and Compliance Tips (from TG 57)

  • Properly allocate expenses between investment and charitable activities.
  • Document 1969 FMV for legacy assets.
  • Verify exempt operating foundation status with determination letter.
  • Review prior/subsequent 990-PF and 990-T filings for consistency.
  • Watch for Subpart F inclusions or Section 965 impacts.

Maintain strong records—examiners focus on large, unusual, or questionable items.

Recent Changes and Current Status (as of 2026)

  • 1.39% flat rate applies to all post-2019 years; no 1% reduction option.
  • Electronic filing mandatory for Form 990-PF and (for private foundations) Form 4720 where applicable.
  • No major legislative changes to the core 1.39% rate have taken effect for 2025–2026 tax years.

Note on proposals: Some 2025 discussions suggested tiered increases for very large foundations, but these have not been enacted into law. Always check IRS.gov for the latest.

Resources for Private Foundations

Conclusion: Stay Compliant with Section 4940

The Section 4940 tax is a modest but mandatory cost of operating a private foundation. IRS Publication 5580 provides the clearest roadmap for accurate calculation and audit-ready compliance.

Foundations that properly track investment income, allocate expenses, and leverage available basis rules can minimize the tax burden legally while fulfilling their charitable missions. For complex situations—especially those involving legacy assets, foreign investments, or operating foundation status—consult a qualified tax advisor or CPA familiar with exempt organizations.

Bookmark this guide and the official IRS Publication 5580 PDF for quick reference. Accurate reporting protects your foundation’s tax-exempt status and avoids penalties under the Chapter 42 regime.

Last updated for tax years 2025–2026 based on IRS Publication 5580 (Rev. 8-2024) and related official guidance. For the most current information, always verify directly on IRS.gov.