Legislative Win for Philanthropy: Simplified Private Foundation Excise Tax
The tax and spending legislation — released by bipartisan negotiators and passed by the House of Representatives this week — contains significant victories for private foundations and the nonprofit sector, which will allow more funding to be focused on meeting community needs. As the legislation moves forward to be signed into law by the end of the week, our team at Philanthropy California strongly urge swift adoption in the U.S. Senate and thank House members who supported the legislation.
The legislation would simplify the private foundation excise tax at a single rate of 1.39 percent and eliminate the two-tiered system. Currently, private foundations must pay a two percent excise tax on investment income that can be lowered to 1 percent if the foundation’s grantmaking exceeds the average distribution rate in the preceding five years. Many private foundations expend substantial resources to manage the excise tax rate to be at one percent, with the finance officer closely monitoring the distribution rate from year-to-year to monitor carefully the rolling average payout.
The simplification of the private foundation excise tax has long been a goal for our sector. The excise tax’s difficult administration and complicated two-tier structure have often created a barrier for foundations looking to support communities when unanticipated needs arise, such as natural disaster relief efforts or grants to help communities facing other tragedies or crises. By simplifying the tax, private foundations will be able to more effectively serve our nonprofit partners by deploying more resources to community-led solutions.
In collaboration with national, regional and local partners — including Independent Sector, Alliance for Charitable Reform, Council on Foundations, and United Philanthropy Forum — Philanthropy California has advocated diligently for these provisions contained in House Resolution 1865 on behalf of our members.
“This change to the excise tax formula for private foundations is long overdue. We are hopeful that Congress will move this legislation forward, enabling us to prioritize our grantmaking rather than spending time managing payout to minimize the tax burden. Philanthropy California’s role in moving this effort across the finish line demonstrates the power of unified voices to influence meaningful policy change,” said Wendy Garen, President & CEO, The Ralph M. Parsons Foundation.
Additionally, the tax on nonprofits related to transportation benefits (known as unrelated business income tax or UBIT) will be repealed and retroactive – so nonprofits and foundations that had to pay the tax for transportation benefits can receive a refund. The tax and spending legislation has cleared the House and will head to the Senate, before taking into effect upon signature of the President.
On behalf of Philanthropy California, our members, and our partners across the state, we would like to express our gratitude to the bipartisan negotiators, the California Congressional Delegation who supported the legislation, and our coalition of foundation leaders for their work.
This effort would not have been possible without the relationships we have built over the last four years with philanthropic leaders from across the state. To get involved in our national public policy work, join the Philanthropy California delegation at Foundations on the Hill, which brings together the nation’s foundations and grantmaking associations to Washington, D.C. for two days of engagement with policymakers.