On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, 2020. The bill will, in effect, create a flat net investment income (NII) excise tax rate of 1.39% for private foundations.
Most private foundations are subject to an excise tax on NII, which includes interest, dividends, rents, royalties, payments pertaining to certain security loans, similar investment income items, and capital gains.
Previously, the NII excise tax rate depended on whether the private foundation could meet specific distribution requirements. If the foundation failed to meet the distribution amount, it would then be subject to a 2% excise tax rate. Note that the distribution requirement used to determine the reduced excise tax rate was a separate calculation from the annual distribution requirement for private foundations.
If the NII is subject to unrelated business taxable income (UBTI), usually due to debt-financing, the portion subject to UBTI will be taxed using income tax rates and excluded from NII .
The original purpose of the dual-rate approach was to incentivize private foundations to pay-out more in grants or direct charitable expenditures. In addition, the excise taxes collected were to be used to ensure the private foundation sector was compliant. However, as the years passed, it became evident that the funds were not being used primarily for the private foundation sector, and the dual NII rate created additional complexity for private foundations. As far back as 2001, there have been various congressional bills proposing a flat NII excise tax rate for private foundations. Often, the rate proposed was indexed to be revenue-neutral to the government.
The new NII law goes into effect for private foundations with tax years beginning after December 20, 2019. For virtually all foundations, the new 1.39% excise tax rate will be used on the 2020 Form 990-PF. This new rate simplifies the reporting for foundations, as it eliminates Part V and Lines 5 and 6 of Part XII of the Form 990-PF. The change first affects the 2020 estimated tax payment calculations.
For calendar year-end foundations, the first estimated tax payment is due on May 15, 2020. Foundations should use the flat 1.39% rate rather than trying to project a 1% or 2% rate for their first estimated tax payment.
If you have any questions on the new excise tax rate, please contact a Clark Nuber professional.
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