Self-Dealing Rules for Private Foundations: How to Stay Compliant

Running a private foundation means balancing mission, stewardship, and compliance—all at once. When it comes to IRS oversight, self-dealing is one area where the rules are strict, and the penalties can escalate quickly. At its core, self-dealing occurs when a foundation’s funds or assets improperly benefit a “disqualified person.” 

Even unintentional conflicts or routine transactions can trigger issues, including excise taxes that start at 20% of the excess benefit. To support your foundation’s integrity and protect your mission, here’s a clear breakdown of what the IRS considers self-dealing and how to stay on the right side of the rules. 

What Is Self-Dealing? 

Self-dealing includes any direct or indirect transaction between a private foundation and a disqualified person. The IRS identifies seven prohibited transactions, regardless of the dollar amount or intent: 

1. Sale, Exchange, or Leasing of Property – Foundations cannot sell, exchange, or lease property to disqualified persons. (Renting from a disqualified person is allowed in limited cases.) 

   
   

2. Leasing Arrangements – Any lease between a foundation and a disqualified person is generally considered self-dealing. 

   
   

3. Lending Money or Extending Credit – Foundations may borrow from disqualified persons, but they cannot lend money, extend credit, or transfer liabilities to them. 

   
   

4. Providing Goods, Services, or Facilities – Offering goods, services, or facilities to a disqualified person is prohibited. 

   
   

5. Paying Compensation or Reimbursements – Overcompensation or excessive reimbursements to a disqualified person qualify as self-dealing. 

   
   

6. Transferring Foundation Income or Assets – Foundations cannot transfer assets or income to disqualified persons or satisfy their personal pledges. 

   
   

7. Payments or Agreements with Government Officials – Providing payment or entering into certain arrangements with government officials is not allowed. 

While there are exceptions, these seven categories are the baseline rules every private foundation must follow. 

Who Is a Disqualified Person? 

A disqualified person isn’t just a board member or major donor. It can extend further than many foundations realize. The IRS considers the following as disqualified: 

• Officers, directors, and trustees 

• Substantial contributors (generally, 2% of support or more than $5,000 contributed) 

• Any person who owns more than 20% of a substantial contributor 

• Linear family members (ancestors, descendants, spouses) 

• Corporations, trusts, estates, or partnerships where 35% or more is owned by disqualified persons 

Understanding who falls into this category is essential for preventing inadvertent self-dealing. 

Five Ways to Prevent Conflicts of Interest 

Protecting your foundation from compliance issues starts with strong internal systems. Here are five practical steps: 

1. Identify Disqualified Persons Create and maintain a current list of all disqualified persons to help your team evaluate new donations, transactions, and commitments. 

2. Establish Correction Protocols Mistakes happen—even in well-run foundations. Having a documented correction plan can help you reverse a prohibited transaction quickly and minimize penalties. 

3. Educate Your Team Training is one of the strongest tools you have. Make sure your team knows who counts as a disqualified person and which transactions are off-limits. 

4. Strengthen Documentation Clear, organized records help identify risks early. Document all parties, amounts, and transaction details so potential issues don’t go unnoticed. 

5. Seek Outside Counsel Some situations fall into gray areas. When they do, leverage your legal advisors or an independent CPA firm to guide you through the nuances. 

Bottomline 

Understanding and proactively managing self-dealing rules helps safeguard your private foundation’s mission, reputation, and resources. With the right systems in place, your foundation can stay compliant—and stay focused on impact. 

At BryMar, we work alongside private foundations year-round to support strong stewardship and confident decision-making. From monthly and quarterly bookkeeping to audit preps, audits, board presentations, and consulting, our team helps ensure your foundation’s financial practices stay transparent, compliant, and mission-aligned.  

If your private foundation is looking for a proactive partner to strengthen your financial systems and support your compliance needs, connect with BryMar today—we’re here to help you and your mission and thrive.