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.
06/24/2016 House GOP Releases Tax Reform Plan
Today, House Speaker Paul Ryan (R-WI) unveiled a blueprint that outlines a tax reform plan. It’s a mixed bag.
06/17/2016 Hatch Extols Charitable Giving as Nonprofit Leaders Tell Congress to ‘Grow Charity Now’
The Alliance for Charitable Reform partnered with the Council on Foundations and Independent Sector to bring nonprofit leaders to Washington, D.C. on June 16 to meet with congressional offices about current legislation supporting charitable giving. The fly in/speak out day was dubbed “Grow Charity Now.”
04/13/2016 Bipartisan House Bills Aim to Grow Charitable Giving
WASHINGTON, D.C.— Rep. George Holding (R-NC), along with Reps. Erik Paulsen (R-MN), Pat Tiberi (R-OH) and Devin Nunes (R-CA), Mike Kelly (R-PA), and Gene Green (D-TX) introduced H.R. 4907, the Grow Philanthropy Act, Tuesday evening. The bill would allow distributions to donor-advised funds (DAFs) in the IRA charitable rollover, a provision strongly supported by the Alliance for Charitable Reform (ACR).
To see previous updates about the private foundation excise tax, click here.