Mission: Accountable » Kelly Hein

Possible Change in Private Foundation Tax Rates

Kelly Hein — Thu, 26 Mar 2009 03:15:26 +0000

Senators Schumer, Levin and Stabenow announced today they’ve introduced legislation to simplify the excise tax that applies to private foundations (PFs). In place of the current two-tiered system (1%/2%), the bill would institute a single tax rate. Based on a study by the Council on Michigan Foundations, a tax rate of 1.32% for all PFs would result in no net change in the total excise tax collected from PFs.

The Senators expect their revision would spur increased distributions from PFs to public charities. Under the current system, a PF pays the 1% tax in years where its distributions as a percentage of its asset base exceed the 5-year weighted average of distributions to asset base. Thus, a PF can manage its tax liability by making small incremental increases in its giving level.

Conversely, when a PF has a significantly higher distribution percentage in a given year (for instance, following Hurricane Katrina), the PF will be penalized in future years by the increase in the 5-year weighted average, unless they continue with the new higher distribution percentage. The proposed legislation would free PFs from deciding between a desired contribution and their future tax bills.

If you have questions about the proposed legislation, contact us.

Is a Private Foundation right for me?

Kelly Hein — Sat, 07 Feb 2009 19:39:33 +0000

Situation: You are interested in setting aside a pool of assets for use in current and future charitable giving. You aren’t certain to whom contributions will be made. You would like to receive a tax deduction for the funds you set aside. How can you accomplish your objectives?

Short Answer: A private foundation (PF) or a donor advised fund (DAF).

Question: Which one should I choose?

Deeper Answer: It depends.

Both a PF and a DAF meet the primary objective of generating a charitable deduction in the year of transfer, even though no funds may actually reach a charitable organization that puts those funds to use in their particular charitable endeavor. There is one primary reason that a PF may make sense for a donor – control. The donor of a PF will determine the initial members of the foundation’s board, and usually serves on the board. The board controls the ultimate distribution of funds to outside charities and controls the selection of all investments made by the PF. With a DAF, the donor can recommend charities to receive disbursements of funds, but the final decision rests with the management of the DAF. Also, depending on the DAF, available investment choices may not allow for investments that meet the donor’s wishes.

For assistance in determining your best alternative, contact us.

Required Distributions – Private Foundations

Kelly Hein — Mon, 05 Jan 2009 19:39:16 +0000

Private foundations (PFs) are required to annually distribute a portion of their assets for charitable purposes. Qualifying distributions can take the form of distributions to public charities or can be expenditures made by the foundation to carry out its own charitable purpose.
The required distribution for a given year is 4.925% of the fair market value of the PF’s assets, net of any debt used to acquire the assets.
The required distribution for a given year must be made by the end of the following year to avoid a 30% penalty (a calendar year PF must make its required 2009 distribution by December 31, 2010). The additional year is allowed so that the PF can compute the required amount as part of its Form 990-PF tax filing which is not completed until the year following the tax year in question.
For questions about the penalties, see IRS Form 4720 and its instructions (see Schedule B on page 6).
Additional questions? – contact me.