On December 20, 2019, President Trump signed the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the “Act”) as part of the spending legislation to fund the government for the 2020 fiscal year. This Act also included a provision to simplify the private foundation excise tax on net investment income.

Previously, under Section 4940(a) of the Internal Revenue Code, an excise tax was imposed on the net investment income of private foundations at the rate of 2%. However, this 2% tax was decreased to 1% if the foundation’s charitable distributions for a tax year exceeded the average distribution rate during the preceding 5 years; i.e., the two-tiered system.

The Act replaces this two-tiered system with a flat tax of 1.39%, thus eliminating the need for foundations to consistently monitor their investments/distribution rate in order to qualify for the reduced tax rate.

The new 1.39% tax rate is effective for tax years beginning after the Act’s date of enactment. Thus, for foundations with a calendar year-end, the effective date is January 1, 2020.

If you have any questions, please contact Janice Ratica, Nonprofit Tax Services Leader at janice.ratica@elliottdavis.com or Denise Hill, Nonprofit Tax Senior Manager at denise.hill@elliottdavis.com.

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