Private Foundation Excise Tax

The Council has strongly advocated for simplifying the private foundation excise tax to a flat rate for over a decade. For the past few years, a flat rate of 1 percent has been floated by policymakers, and the Council supports this simplification.

Each year, private foundations are required to pay an annual excise tax equal to 2 percent of their net investment income. If a foundation’s distributions (measured as a percentage of assets) in a given year exceed the average payout rate of the foundation over the preceding five years—by an amount at least as much as the 1 percent tax savings the foundation will enjoy—then this tax is reduced to 1 percent. This “maintenance of effort test” was intended to ensure that the tax savings be used for additional charitable expenditures and not just “pocketed” by the foundation. Revenues from the excise tax are meant to fund IRS oversight of the nonprofit sector, though this has not consistently been the case.

The current private foundation excise tax is complicated to administer and, because of its overly complicated, two-tier structure, it often creates a disincentive when foundations consider increasing giving for unanticipated grants, such as the Hurricane Sandy relief efforts. Under the two-tiered rate, foundations can actually be penalized with higher taxes when they give more during times of extraordinary need. In addition, calculating the tax rate requires foundation staff to constantly monitor and adjust their investments and spending ­– time and money that would be better spent serving their communities.

For many years, tax experts, lawmakers such as former House Ways and Means Chairman Dave Camp in the Tax Reform Act of 2014, the Obama Administration in its annual President’s Budgets, and even the Joint Committee on Taxation have recommended simplifying the tax to a single, flat rate.

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