The private foundation excise tax is an annual tax imposed on the net investment income of most private foundations. The tax is currently 2% for most foundations, but can be as high as 1% for certain new foundations, and 0.5% for certain grandfathered foundations.
The tax is imposed on the foundation's net investment income, which generally includes interest, dividends, rents, royalties, and capital gains. As a private foundation, you are required to pay an excise tax on your investment income. You can visit this site to learn more about foundation’s excise tax.
Here are some strategies to minimize your foundation’s excise tax liability:
1. Make sure your foundation is classified as a “private operating foundation” by the IRS. This classification allows you to deduct your expenses related to the operation of your foundation, which can significantly reduce your excise tax liability.
2. Invest in low-risk investments such as government bonds or mutual funds. These types of investments tend to generate lower levels of income, which means you will owe less in excise taxes.
3. Make grants to qualified organizations that are exempt from paying excise taxes. This includes organizations such as public charities and certain types of private foundations. By making grants to these organizations, you can reduce your overall excise tax liability.
4. Stay within the annual exemption amount for excise taxes. For 2020, the exemption amount is $1,000 per year for most private foundations. This means that if your foundation’s investment income does not exceed $1,000 in a given year, you will not owe any excise taxes on that income.
If you are the trustee or director of a private foundation, it is important to be aware of the excise tax and to make sure that your foundation complies with the rules governing it.