Removing Barriers to Grantmaking, One Provision at a Time

User .John Cochrane
Posted Date : August 27, 2014

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When disaster strikes, who do you call first? Unless she’s a volunteer firefighter, you probably didn’t say your accountant. Foundations are often the first to offer critical resources to charities that are on the ground helping serve the immediate needs of victims. But when a private foundation wants to act in times of crisis, they often have to call the lawyers and accountants first.

That’s because they have to deal with an outdated and over complicated piece of tax policy – the two-tier private foundation excise tax. For over a decade, the Council has aggressively advocated for a simplified tax that would let foundations spend more time on grantmaking and less on accounting.

Private foundations are adept at both responding quickly in times of imminent need, and providing critical resources to help rebuild communities over the long-term. The John D. and Catherine T. MacArthur Foundation awarded over $7 million in the aftermath of Hurricanes Katrina and Rita for urgent needs such as mobilizing volunteers, developing affordable housing for victims, and establishing regional recovery loans. Dozens of private foundations responded swiftly to the devastating tornado that struck Moore, Oklahoma in 2013, providing victims with access to food, water, shelter, and other basic needs. This year, the Conrad A. Hilton Foundation is awarding over $1 million to NGOs that work with refugees fleeing the humanitarian crisis in Syria. These are just three out of countless examples of private foundations helping communities get back on their feet after tragedy strikes.

Private foundations pay 2 percent of their net investment earnings towards the excise tax, but this rate becomes 1 percent in any year when their grantmaking (measured as a percentage of assets) exceeds their average grantmaking levels from the previous 5 years. This complicated, two-tier system serves as a disincentive to increased giving, especially in times of crisis or economic turmoil.

Like any charitable organization, most private foundations would want to pay out more in grants during difficult economic times or when disasters hit. Yet, as one of our large private foundation members explained to us recently, a higher grant payout this year to assist farmers impacted by drought or attend to the needs of unaccompanied children in the Southwest will make it much more challenging for the foundation to qualify for the lower tax rate during the next 5 years.

This Council member emphasized the lengths its staff go to in order to manage the current, complex tax. As the member explained, when the market is down, the law gives foundations a perverse incentive to decrease giving so that the foundation’s spending rate does not skyrocket and lead to higher tax liability down the road. As a result, the tax code gives the foundation a strong incentive to decrease its grantmaking during times of economic stress, when its grantees experience the greatest need.

A flat rate will greatly simplify tax planning, especially for smaller foundations. Foundations spend considerable time and money every year ensuring the amount they spend on charitable grants is neither too high nor too low—valuable resources paid out to accountants and lawyers rather than charities.

That’s why we are thrilled that the House passed the America Gives More Act (H.R. 4719), which includes a long-sought provision that would simplify the two-tier excise tax to a single rate of 1 percent.

The flat, 1 percent tax rate will lift the administrative burdens that creates the perverse incentive for private foundations to give less, not more, in times of urgent need.

But, the America Gives More Act must still be voted upon by the Senate before it can become law. Here is where you can play a role. Use the Council’s advocacy toolkit to reach out to your Senators and ask them to support simplification of the private foundation excise tax by voting for the America Gives More Act.

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