A discussion that occurs at nearly every board meeting (not to mention audit, grants and finance/investment committee meetings) of a private foundation is whether the investments and grants for the year can be “managed” to reduce the excise tax on net investment income to 1 percent. Since the enactment of the Tax Reform Act of 1969, when the tax on net investment income was first introduced, the rate of tax has been 2 percent which could be reduced to 1 percent if the percentage of the current year’s charitable spending exceeded the average of the prior 5 years’ spending.
After some 50 years, and many years of talking about it, Congress is on the verge of changing the law. On Feb 12, 2015, the House of Representatives passed H.R. 644, America Gives More Act of 2015. Among other things, the Act proposes make the excise tax on the net investment income 1 percent in all cases, irrespective of the private foundation’s charitable spending for the year. The Republican-controlled Senate is likely to agree, and the bill may be on the President’s desk shortly for his signature.
Time for celebration? Not just yet. In the past, the President has indicated that he would not sign into law any tax legislation that was not at least “revenue neutral” (i.e., any tax decreases must be offset or exceeded by tax increases). According to the Joint Committee on Taxation, the Act, including its various other provisions, will reduce tax revenues by about $14 Billion over the next 10 years. The reduction of the net investment income excise tax to 1 percent in all cases alone will reduce tax revenues by $2 Billion over the same period. The President’s proposed budget for fiscal year 2015-16, does support a reduction of the tax to 1.35 percent in all cases; however, it is likely that assumes proposals in his budget that raise taxes also would be enacted so that, overall, the tax provisions would be at least revenue neutral.
So, stay tuned, and don’t count on a reduced excise tax until all of the chickens have hatched.