In an effort to harmonize the foundation world and to avoid frequent attempts at creative re-classifications of foundations, the federal government has now ratified (with the President’s signature) a modification to Section 4940 of the Internal Revenue Code (“IRC”). Under the old regime (in effect since 1969), private foundations were subject to a two tier system in which private non-operating foundations would pay 2% of their net investment income and private operating foundations (foundations with at least 85% of their net income or minimum investment return (whichever is less) devoted to programs) would only pay 1%.
One can only imagine what happened when it came time for foundations to file annual tax returns and pay the excise tax. Now with the newly enacted modifications to Section 4940 of the IRC, all foundations pay 1.39% of their net investment income regardless of type. With this modification, this will make it easier for the IRS and the accounting industry representing foundations.
For calendar year tax payers, this won’t go into effect until 2020.