Private Foundations: Change in Excise Tax Rate

January 14, 2020

By Timothy Schroeder, CPA

On Friday, December 20, 2019, President Trump signed into law the 2020 spending bill. The spending bill includes a provision applicable to private foundations that changes the current excise tax rate from a two-tiered structure to a single flat-tax rate. Currently, a private foundation is either subject to a 1% or 2% excise tax rate on net investment income based on a calculation of their current year qualifying distributions compared to a five-year average distributable amount calculation that incorporates the previous five years qualifying distributions and noncharitable-use assets. The two-tiered structure has now been revised and simplified to a single flat-tax rate of 1.39% on net investment income.

A single flat-tax rate enables private foundations to make more accurate estimated payments throughout the year.  Similarly, this eliminates the cost benefit analysis many foundations faced with respect to front-loading grant making in order to qualify for a reduced tax.  Foundations that were qualifying for the 1% tax may want to update their forecasts and budgets to allow for the new 1.39% tax.  While this may negatively affect certain foundations’ bottom line, over time it should have a smoothing effect on that particular budget line item. 

This change is effective for tax years beginning after December 20, 2019.

About Timothy Schroeder

Timothy Schroeder is a Not-for-Profit Services Group Manager with expertise in audits of financial statements and employee benefit plans, including the preparation of Form 990.