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Simplification of the Excise Tax

Publication date: 
January, 2017

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 Position

Consistent with the Forum’s mission to enhance, expand and explain philanthropy, the Forum supports public policy that encourages charitable giving. The Forum supports the role that tax policy plays in encouraging and structuring gifts that support nonprofit organizations and communities. The Forum board adopted the following position statement on simplification of the excise tax: “The Forum supports simplification of the private foundation excise tax on net investment income to a revenue neutral flat rate.”

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