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US Tax Changes Affect Private Foundations

Tom Burroughes, Group Editor , January 6, 2020


Rules put into law at the end of last year - and little discussed outside narrow circles - will affect the amount of tax private foundations pay on their distributions. An organization working in the sector offers brief comments on the effects.

(Repeat of item run on January 3.)

New US legislation enacted late 2019 will affect how much tax private foundations pay on their distributions, with some getting a cut and others paying more.

The Further Consolidated Appropriations Act 2020 – also known as H.R. 1865 – became law on December. 20, 2019. Within this act are two important provisions: The simplification of the excise tax on net investment income; and the retroactive repeal of the unrelated business income tax on qualified transportation fringe benefits.

Private foundations are currently required to pay a 2 per cent excise tax on net investment income. If certain distribution requirements are met, the tax can be reduced to 1 per cent. Beginning with the fiscal 2020 tax year, the excise tax rate has been set at a flat of 1.39 per cent regardless of what foundations distribute. In practice, this means some foundations will pay more and some less, although adjusting grants to qualify for a lower rate will no longer be necessary, according to Exponent Philanthropy in a note a few days ago. 

“The flattening of the excise tax is something that has been discussed for years. By having one rate of 1.39 per cent, foundations can concentrate on grant distributions, without a tax consideration, in pursuit of their philanthropic goals,” Tom Blaney, Exponent Philanthropy board vice chair and treasurer of the McCaddin-McQuirk Foundation, said.

As far as the second change is concerned, the unrelated business income tax, or UBIT, on qualified transportation fringe benefits, has been repealed retroactively to the original date of enactment (December 2017). If this affected a foundation, those running them may need to file amended 990T returns to claim a refund for taxes paid or incurred after December 31, 2017.

Tax changes in recent years – such as the Trump administration’s doubling of estate tax exemptions – have prompted commentary in the philanthropy sector. (See regular FWR contributor Susan Winer for an overview of developments in 2019 and predictions for 2020.)

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