Michele A. W. McKinnon, Douglas W. Charnas, Milton Cerny and Justin F. Trent, of McGuire Woods, discuss the 2% excise tax on net investment income of private foundations, proposals to address the tax and how to deal with it currently.   Their article begins as follows:

Despite being exempt from federal income tax under Internal Revenue Code Section 501(a) as organizations described in Internal Revenue Code Section 501(c)(3), private foundations are subject to an excise tax on their net investment income under the special tax rules that apply to private foundations. Generally, the tax is 2 percent of the foundation’s net investment income. The tax may be reduced to 1 percent in certain circumstances if the foundation makes a certain level of distributions.

This tax has been getting attention in Congress. The America Gives More Act of 2014, which was passed by the U.S. House of Representatives on July 17, 2014, would simplify the private foundation tax on net investment income by replacing the current two-tier tax with a single rate of 1 percent. On Feb. 26, 2014, Rep. Dave Camp, R-MI, the chairman of the U.S. House of Representatives’ Ways and Means Committee, released a discussion draft of a Tax Reform Act of 2014. Included among the reforms impacting tax-exempt organizations is a provision simplifying the current tax on a private foundation’s net investment income by replacing it with a single, 1 percent tax rate. The draft law, however, would expand the tax so it applied not only to private non-operating and private operating foundations, but also to “exempt” operating foundations, which currently are excluded from the tax.*

Read full article at Private Foundations: Hoping for Reform but Mastering Today’s Net Investment Income Tax.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.