IRS Publication 5581 – IRS Form, Instructions, Pubs 2026

IRS Publication 5581 – Private foundations must distribute a minimum amount of income annually to support charitable activities. Failure to do so triggers excise taxes under IRC Section 4942. IRS Publication 5581 (Exempt Organizations Technical Guide TG 59) offers detailed technical guidance on these rules, calculations, and compliance strategies.

Published in August 2024 (Catalog Number 73364Z), this 100+ page guide helps foundation managers, tax professionals, and IRS examiners understand and apply the law accurately. Download the official PDF here: https://www.irs.gov/pub/irs-pdf/p5581.pdf.

What Is IRS Publication 5581 and Who Needs It?

Publication 5581 explains the excise taxes imposed on private foundations (Section 501(c)(3) organizations not classified as public charities under Section 509(a)) that fail to make timely qualifying distributions.

It covers:

  • Background and legislative history (Tax Reform Act of 1969, Economic Recovery Tax Act of 1981, Pension Protection Act of 2006).
  • Computation of the distributable amount, minimum investment return, and qualifying distributions.
  • First-tier (30%) and second-tier (100%) excise taxes.
  • Set-asides, carryovers, corrections, and abatement procedures.
  • Examination techniques and issue indicators.

Note: The guide is not an official pronouncement of law or IRS position. Always consult the Internal Revenue Code, regulations, and a qualified tax advisor for your specific situation.

Key Definitions Under IRC Section 4942

  • Private foundation — Any 501(c)(3) organization that is not a public charity.
  • Minimum investment return — Generally 5% of the fair market value of assets not used directly in exempt activities (minus acquisition indebtedness). For short years, prorate by days/365.
  • Distributable amount — Minimum investment return minus Section 4940 net investment income tax (currently 1.39% for years after Dec. 20, 2019) and income taxes, plus certain repayments or released set-asides (Section 4942(d)).
  • Qualifying distributions — Cash or property paid to accomplish Section 170(c)(2)(B) charitable purposes, amounts to acquire exempt-use assets, or qualifying set-asides (Section 4942(g)).
  • Undistributed income — Distributable amount minus timely qualifying distributions.

Step-by-Step: How to Calculate the IRC 4942 Excise Tax?

  1. Compute the minimum investment return (5% of non-charitable assets).
  2. Subtract taxes on net investment income (Form 990-PF, Part VI) and income taxes → get the distributable amount.
  3. Subtract qualifying distributions made during the year (or elected from prior years) → determine undistributed income.
  4. If undistributed income exists at the end of the following taxable year:
    • First-tier tax (Section 4942(a)): 30% on the undistributed amount (doubled from 15% by PPA 2006).
    • Second-tier tax (Section 4942(b)): Additional 100% if not corrected by the end of the taxable period.

Payment of the tax itself does not count as a qualifying distribution.

Qualifying Distributions: What Counts?

  • Grants to public charities or other allowable recipients (with restrictions on certain controlled supporting organizations per PPA 2006).
  • Direct charitable expenditures (salaries, overhead for exempt programs).
  • Program-related investments (Section 4944(c)).
  • Acquisition of exempt-use assets.
  • Qualifying set-asides (see below).

Expenses must be reasonable and directly connected to exempt purposes.

Set-Asides, Carryovers & Special Rules

  • Set-asides — Treated as qualifying distributions if they meet the suitability test (advance IRS approval) or cash distribution test (no approval needed, but specific payout schedule over 4–5 years).
  • Excess qualifying distributions carryover — Applied to reduce the distributable amount for the next 5 years (adjustment period).
  • Operating foundations have modified rules under Section 4942(j).

Corrections, Abatement & Reasonable Cause

Foundations can avoid or abate taxes by correcting the failure during the correction period (generally ends 90 days after IRS notice of deficiency, with extensions possible). Correction requires reducing undistributed income to zero via additional qualifying distributions.

Abatement is available under Section 4962 if the failure was due to reasonable cause and not willful neglect.

Common Examination Issues & Red Flags

The guide highlights indicators such as:

  • Understating asset values → lower minimum investment return.
  • Misclassifying expenses or grants.
  • Improper set-asides or pass-through contributions.
  • Failure to file Form 4720 when required.

Use the lead sheets and worksheets in Publication 5581 (Chapter VI) for self-review.

Real-World Examples from the Guide

The publication includes detailed worksheets and scenarios, such as:

  • Applying excess distributions from prior years.
  • Set-aside calculations for multi-year projects (20%/40%/60%/80% start-up rules).
  • Impact of self-dealing or taxable expenditures on qualifying distributions.
  • Publication 5580 (TG 57): Taxes on Net Investment Income (IRC 4940)
  • Form 990-PF instructions
  • Form 4720 (Return of Certain Excise Taxes)
  • Treasury Regulations §§ 53.4942(a)-1 through -3

Download & Stay Compliant

Get the latest version: IRS Publication 5581 PDF (Rev. 8-2024)

Private foundations must file Form 990-PF electronically for tax years beginning on or after July 2, 2019.

Bottom line: Proper planning and timely distributions avoid costly 30% + 100% excise taxes. Review Publication 5581, maintain excellent records, and work with an exempt-orgs tax specialist to ensure full compliance with IRC Section 4942.

This article summarizes official IRS guidance as of the 2024 revision. Tax rules can change—verify with current law and professional advice.