Mary Vallier-KaplanNo Good Deed Goes Unpunished: How the Excise Tax on Private Foundations Hinders Giving

By: Mary Vallier-Kaplan In: Legal| Public Policy

18 Apr 2011

The unprecedented and protracted economic crisis had far-reaching impact on New Hampshire’s nonprofits. The Endowment for Health, like most organizations, also experienced a significant impact on its assets. Nonetheless, in the midst of this crisis, the foundation’s board decided to exceed the IRS-required 5 percent distribution level, instead giving closer to 8 percent.

That increased funding level for program year 2009 deployed more funds than legally required and allowed the Endowment to uphold all of its grant commitments as well as to support some much-needed new work in all of its interest areas.

But doing the right thing for our state’s nonprofit community meant that we took an extra tax hit for distributing more grant dollars than required. The Endowment also developed a five-year plan to responsibly return to the 5 percent annual distribution. We needed to do this to balance the dual responsibility of fulfilling our mission and protecting and growing our assets over the long run. When the foundation began to implement this plan, assets were recovering as we decreased our payout rate from 8 percent to 6 percent. Because the foundation decreased its payout amount closer to normal levels, it was required to pay $82,000 in additional excise taxes.

That additional $82,000 could have been used to assist organizations that protect the health of New Hampshire’s people, such as an emergency grant to a community health center, a year’s training for mental health professionals, salary and benefits for a school-based public-health dental hygienist, or two home health visitors to work in a community for one year.

The Endowment for Health could have opted to make its decisions exclusively based on a tax code instead of living by its mission. Due to the sizeable decrease in assets during the financial crash, the Endowment was not actually required to distribute any grant funds. But we believed that would be a serious misinterpretation of priorities and responsibilities. We would be shifting our problems unfairly onto our partners.

For a foundation like ours, which grants less than $2 million a year, that additional $82,000 in excise tax was sizeable. And because we are still implementing our plan to return to the customary 5 percent distribution, we anticipate being in the same tax situation next year as well.

In the Endowment’s case, we knew we’d be taking a tax hit long before we distributed the extra funds to our community partners. But I wonder how many private foundations might have decided not to take the tax hit, and therefore held back on distributing much-needed funds.

It is high time our lawmakers took a hard look at this arcane, 40-year-old tax code. We need to create a fair, flat tax that will no longer penalize private foundations for doing the right thing when the need is greatest.

By Mary Vallier-Kaplan is vice president and chief operating officer of Endowment for Health in New Hampshire

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