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Private Foundations Excise Tax: Is the End of the Two-Tier System Near?

Publication date: 
Tuesday, October 8, 2019

By Seyron Foo


Thinking about your excise tax rate? Congress is once again considering simplifying the private foundation excise tax to one tax rate and that may affect you in the future. Currently, private foundations must pay a 2 percent excise tax on investment income. This 2 percent tax may be lowered to a 1 percent excise tax on investment income if the foundation’s grantmaking exceeds the average distribution rate in the preceding 5 years. Many refer to this as a “two-tier” excise tax system.

The simplification of the private foundation excise tax has long been a goal for our sector. Many private foundations expend resources to manage the excise tax rate to be at 1 percent, with the finance officer monitoring closely the distribution rate from year-to-year to manage carefully the rolling average payout. This can often times frustrate program officers looking to respond to a natural disaster that would “spike” grantmaking in a given year, and consequently raise the overall payout rate. Or grantmaking staff may face a last quarter board meeting that received end-of-year advice to decrease grants to maintain an average distribution consistently with past years.a

As included in HR 3301, the House Ways and Means Committee has proposed a flat, 1.39 percent excise tax on private foundations. If enacted by December 31, 2019, the bill would take into effect in the 2020 tax year. Our sector has long advocated for such simplification, although at 1 percent. However, a 1 percent excise tax would result in a net loss of tax revenue for the federal government, raising concerns with Congressional staff. The proposed 1.39 percent would be “revenue neutral” for the federal government.

The bill appears to enjoy the support of the House at this time, as well as national and regional organizations such as The Alliance for Charitable Reform, Council of Michigan Foundations, Council on Foundations, and Southeastern Council on Foundations. At SCG, we have been sharing this information widely – through our Public Policy Roundup, presentations including at one FFIX group, and one-on-one engagement with members. Based on feedback, we have heard strong support for simplification of the excise tax rate, even at 1.39 percent.

The fate of the HR 3301 remains uncertain; we are hearing that the leadership of the Senate Finance Committee is not fully onboard. Advocacy on this issue will be important in order for such a measure to pass. For private foundations, lobbying – taking a position on active legislation – is allowable under a “self-defense” exemption under IRS rules. If you are interested in weighing in on this bill, please contact SCG’s Public Policy Team at [email protected].

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