Private Foundation Excise Tax

October 26, 2018

Each year, private foundations are required to pay an annual excise tax equal to 2 percent of their net investment income (known as the private foundation excise tax). 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. By congressional directive, revenues from the excise tax are meant to fund IRS oversight of the nonprofit sector.

The Council strongly advocates for simplifying the private foundation excise tax to a flat rate of 1 percent.

The current private foundation excise tax is difficult 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.

Bills:

Council Issue Paper: