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Calculating the Minimum Required Distribution

Resource Summary

Step-by-step instructions and formulas for calculating a private foundation’s annual 5% distribution requirement.

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Private non-operating foundations are required by IRS regulations to make a minimum distribution each year for charitable purposes:  roughly 5% of their assets, with certain adjustments, based on the previous year’s assets. (There is no minimum distribution requirement in the founding year.)

Calculating this minimum distribution is complex and includes many components of the foundation’s operations, such as  grants, certain administrative expenses, grants repaid or returned to the foundation, cash reserves, tax liability, etc.

If calculated incorrectly, a foundation could inadvertently underpay its required minimum distribution.  Should that happen, the foundation may be subject to a 30% penalty on the shortfall amount. Moreover, if the penalty is assessed, the foundation would be ineligible to qualify for a reduced excise tax rate of 1% for five years. Because of this, we strongly recommend that foundations seek out professionals who are intimately familiar with the calculations described here.

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