Simplify the Private Foundation Excise Tax

United Philanthropy Forum, several PSOs, and our national partners are coordinating efforts to simplify the private foundation excise tax to a revenue-neutral, flat 1.39%.

The simplification of the private foundation excise tax has previously passed twice in the House of Representatives and most recently was introduced as part of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (H.R. 3301). It is an issue that our sector has been working on for many years.

There is currently support in the House to include this provision in the year-end budget bill. House staffers have conveyed that the year-end package is the only legislation expected to move this year, so it is necessary that the private foundation excise tax simplification language is included in this bill. In support of this effort, Representative Davis (D-IL) and Representative Holding (R-NC) introduced a 1.39% bill (H.R. 4953) earlier this month.

While some past advocacy efforts have focused on bringing down the rate to a flat 1%, members of Congress have signaled that achieving that level is unlikely. In response, the philanthropic community has come together in unified support of the single 1.39% revenue-neutral rate, which has also been an option under consideration for many years.

Background on the Private Foundation Excise Tax

Although private foundations are tax-exempt organizations, they are required to pay an excise tax on their net investment income. Currently, the excise tax on private foundation investment income is determined by a complicated, two-tiered structure. The tax rate is 2 percent but reduces to 1 percent for a year in which a foundation’s distributions exceed the average payout rate of the last five years.

Issues with the Current Tax Structure

The current structure presents two problems for private foundations:

1. The complicated rules make the excise tax difficult to administer. The complexity of determining what tax rate a private foundation pays each year requires significant resources and consistent monitoring of grants and investments.
2. Due to the way the current excise tax is structured, it creates a tax penalty for private foundations that give at a higher rate in one year and then return to normal spending in subsequent years. For example, private foundations that respond to natural disasters by drastically increasing their giving in a given year might then face the higher of the two tax rates for several years afterward.

A 1.39 percent flat rate for all private foundations is revenue-neutral, meaning the change will not affect how much the Treasury collects from the tax as compared to the two-tiered system. The 1.39 percent flat rate addresses both issues outlined above by simplifying the calculation of the tax and removing the disincentive for private foundations to give at higher amounts in times of greater need.