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.