The 5% Distribution Requirement
Non-operating private foundations are required to follow a number of mandates, none more important the 5% distribution requirement, which states that the foundation must annually spend or pay out a minimum amount for charitable purposes. This keeps a foundation from simply raising money, investing assets, and then not disbursing funds in a way that would enable them to further their charitable mission.
IRC Section 4942 imposes a significant tax on “the undistributed income of a private foundation for any taxable year, which has not been distributed before the first day of the second (or any succeeding) taxable year following such taxable year (if such first day falls within the taxable period)….”
Bill Epstein, CPA, a director in our Not-for-Profit Services Group, has written an article developed to help the reader stay in compliance with this requirement. For more information, please read “Private Foundations – Understanding the 5% Distribution Requirement”.