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Policy Issue: Simplification of the Excise Tax

Publication date: 
January, 2017
Simplification of the Private Foundation Excise Tax

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.

Under the current two-tiered structure, a foundation is penalized for making a substantial increase in its charitable spending. A uniform excise tax rate would increase funds available for local communities by freeing private foundations from the administrative task of calculating the amount of additional eligible expenditure needed to qualify for the lower 1% rate.

For example, given a foundation’s current portfolio value, it is projecting a 2% excise tax expenditure of approximately $800,000 for FY 2014. In a straight arithmetic calculation, if a uniform 1% excise rate were in place, the foundation would have an extra $400,000 available for charitable grants to benefit their community this year.

Forum’s Policy Position

United Philanthropy Forum (the Forum) supports simplification of the private foundation excise tax on net investment income to a revenue-neutral flat rate.

Legislation in the 116th Congress

Charities Helping Americans Regularly Throughout the Year (CHARITY) Act (S. 1475)

  • Senators Bob Casey (D-PA) and John Thune (R-SD) reintroduced the bipartisan Charities Helping Americans Regularly Throughout the Year (CHARITY) Act
  • The CHARITY Act would simplify how foundations are required to calculate the federal excise tax imposed on investment income by changing the excise tax on investment income to a flat one percent and thus not requiring foundations to expend time and resources calculating the payout rates of previous years. 
  • In addition, the charity act would make donor-advised funds an eligible charity for purposes of the IRA rollover law that permits an IRA owner at least 70-and-a-half-years old to exclude from his or her gross income up to $100,000 per year in distributions made directly from the IRA to certain public charities, require the Treasury Department to adopt regulations that align the simplified standard mileage tax deduction rate with the mileage rate that applies for medical and moving purposes, and promote transparency by requiring nonprofits to file their annual returns electronically.

In June 2019, the House Ways and Means Committee included a provision in a disaster tax bill that would reduce the private foundation excise tax to a flat 1.39%. At 1.39%, Congress estimates that the change would be revenue-neutral, meaning that Treasury would still collect the same amount of money with the flat 1.39% tax that it currently takes in with the two-tiered system.

The Private Foundation Excise Tax Simplification Act of 2017 (H.R. 2386) was introduced in the 115th Congress and has not yet been reintroduced in the 116th Congress. The bill would have amended the Internal Revenue Code to: (1) reduce from 2% to 1% the excise tax rate on the net investment income of tax-exempt private foundations, and (2) repeal the 1% reduction in such tax rate for private foundations that meet certain distribution requirements.

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