20 April 2015

Private Foundation Excise Tax

Current law requires private foundations to pay an annual excise tax equal to 2% of their net investment income. However, the tax is reduced to 1% in any year in which a foundation’s distributions exceeds the average payout rate of the foundation, calculated over the preceding five years.

This two-tiered tax provision is simply a disincentive for foundations to increase the overall size of grants in any one year — due to disasters, recessions or compelling projects — because the higher level of giving binds the foundation to higher levels of giving in the future. And if the higher levels are unsustainable because, for example, of the foundation’s weaker investment returns, the foundation may not qualify for the lower 1% tax rate.

Moreover, many foundations hire staff and outside auditors to manage the level and timing of their grantmaking to avoid the higher level of tax so as to preserve their funds for charities’ needs. These foundations hire experts to ensure compliance and accurately estimate the fair market value of assets throughout the applicable tax year. One level of tax for all private foundations would eliminate this uncertainty and complexity.

ACR supports establishing a flat rate of 1 percent, which will eliminate the perverse incentive that often deters foundations from increasing grantmaking in times of greater need.

To see previous updates about the private foundation excise tax, click here.