Foundation Source Saves Client $75,000 In Foundation Excise Taxes

Story in: Case Studies

An established foundation became a Foundation Source client in early 2006. During a conference call with the foundation president and the CPA who would be preparing the tax return during the transition year, they complained about the hefty excise taxes owed by the foundation that year, nearly $150,000 based on the standard 2% rate.

Here’s what happened

The assets for this foundation had been fairly stable for a couple of years at $1 – $2 million dollars, as had the income levels. A large funding event of appreciated stock in 2005 brought the foundation’s total assets to $10 million. Later that year, the foundation sold the bulk of the appreciated stock, realizing a significant earnings spike. The calculation to determine the excise tax rate looks at the foundation’s giving pattern over the previous five years, specifically examining the ratio of grants to assets. Since the 5% minimum distribution requirement in any given year is based on the previous year’s assets (then $2 million), suddenly the foundation found that its annual giving became very small as a ratio to current assets.  The CPA preparing the return complained that that the foundation had missed qualifying for the 1% excise tax rate by only a few thousand dollars, but he didn’t know what to do about it.

What We Did

Fortunately, upon review of the foundation’s qualifying distributions, Foundation Source discovered that in 2005 the foundation had committed $15,000 to a matching gift program for a local school; but because the school was unable to meet the commitment requirements in 2005, the grant funds were reserved, but not distributed in that year. When the school met the requirements early in 2006, the foundation then made the matching grant. Since the foundation made the commitment and reserved the funds in 2005, this grant qualified as a “cash set aside,” and counted as a 2005 distribution, even though the actual grant was made in 2006.

How That Helped the Foundation

By being able to count the additional $15,000 grant for 2005, the foundation qualified for the 1% excise tax rate because it changed the ratio of grants-to-assets for that year enough to swing it over. This meant the foundation paid $75,000 less in excise taxes in 2005 that could now go to charity.