Private Foundation Excise Tax

Nonprofit Operations

The Issue

Under current law, private foundations are required to pay a 2 percent excise tax on investment income. Foundations may reduce their rate from two percent to one percent depending on their five-year average distribution rate of charitable funds.

For example, any increase in the foundation’s payout in a given year (i.e. a response to increased needs or crises) makes it more difficult for the foundation to qualify for the reduced one percent excise tax rate in subsequent years.

Private foundations devote considerable resources to determining whether their annual grant-making may qualify for the one or two percent excise tax, because the calculation is dependent upon economic and financial data that is not available until the following year. Advocates frequently propose either the elimination of the excise tax or simplification of the structure to utilize a flat percentage tax, usually one percent.

IS supports simplifying to 1 percent the excise tax rate for private foundations’ investment income.


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