Rogue One: A Single Tax on Foundation Investment Income Story

Posted on Wed, Jan 22, 2020 ©2021 Drucker & Scaccetti


By: Keisha Price, CPA, MST


A Long Time Ago in a Tax System Far, Far, Away…Private Foundations were subject to a 2% tax on net investment income generated from the Foundation’s charitable assets. This 2% tax could be reduced to 1% if the foundation’s current year charitable distributions exceeded its average charitable distributions over the prior five years…until now!


Makes Sense Right?

Well yes! It makes sense for a foundation with a clear charitable purpose, effective directorship, and meaningful assets to give more for the greater good of the galaxy each year and that deserves a tax break.


Constructing the Death Star

Let’s say the good and benevolent founder of the foundation takes a reduced role or even leaves the foundation and the control and direction of the foundation falls into the hands of a conservative droid-like steward. Charitable distributions over the next few years grow stagnant. The foundation still meets the required 5% minimum distribution but fails to exceed the 5-year average distribution ratio. The foundation’s assets are still growing and producing taxable returns. This net investment income once taxed at 1% would now be taxed at 2% under the old law.


A New Hope

With the passage of Taxpayer Certainty and Disaster Tax Relief Act of 2019 on December 19, 2019, Congress decreed a new simplified flat rate of 1.39% tax on all net investment income of private foundations for tax years beginning on or after January 1, 2020. Finally, foundations can make charitable distributions without fear of the dreaded looming Death Star (the 2% net investment income tax).


Solo Sequel - Repeal of Nonprofit Tax on Transportation Benefits

To follow-up the historic passage, the repeal of the loathsome TCJA-enacted 21% unrelated business income tax on qualified transportation benefits, including qualified parking and transit pass programs, was passed on December 20, 2019.  The repeal is retroactive to December 31, 2017 which means organizations can file amended Forms 990-T to claim refunds for taxes paid relative to these transportation benefits.


If you’re a director of a private foundation or financial asset manager, have no fear to call on The Tax Warriors® at Drucker & Scaccetti to help your foundation make the jump to light speed.

Topics: Net Investment Income, Tax Cuts and Jobs Act of 2017, Private Foundation, Qualified Transportation Fringe Benefits, Taxpayer Certainty and Disaster Tax Relief Act, charitable distributions, Forms 990-T

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