Calculation of Rate of Tax on Net Investment Income Streamlined for Foundations

January 2, 2020

In 1969, private foundations were created as a subset of charitable organizations exempt under section 501(c)(3). In order to provide funding for enhanced oversight required by the IRS of this new category of exempt organizations, section 4940 imposed a 4-percent tax on net investment income of such foundations. In 1978, the tax was reduced to 2 percent and then, in 1984, the calculation for qualifying in certain years for a reduced tax rate of 1 percent was added. Since that time, there has been much discussion about what the appropriate tax rate should be, especially in light of claims that the tax collected from private foundations has historically greatly exceeded the cost of monitoring them. For many years, various legislative proposals have included a streamlined rate of tax but none were successful in getting passed until now.

The Further Consolidated Appropriations Act, 2020, signed by the president on December 20, 2019, eliminates the 1- or 2-percent calculation in favor of a single 1.39-percent tax rate on the net investment income of private foundations. This change is effective for tax years beginning after December 20, 2019.