Possible Change in Private Foundation Tax Rates

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.