OBBB Act Introduces Tiered Excise Tax for Foundations
OBBB Act's Overhaul of Private Foundation Taxation: Tiered Excise Tax and Broader Philanthropic Shifts Ahead
The OBBBA includes significant changes impacting private foundations, with most of these provisions taking effect for taxable years beginning after December 31, 2025 (i.e., for the 2026 tax year). Here’s a breakdown of the key changes:
Key Takeaways
What’s changing with private foundation taxes in the OBBBA?
The OBBBA replaces the flat 1.39% excise tax on private foundations with a new tiered system, potentially increasing rates for larger endowments.
When do the new OBBBA tax changes for foundations take effect?
These new tax provisions for private foundations are effective for taxable years beginning after December 31, 2025.
How might the OBBBA impact overall charitable giving?
Broader changes in the OBBBA, like new floors and caps on charitable deductions, could potentially reduce overall giving from high-income donors and corporations.
Increased Taxes on Foundations (Tiered Excise Tax):
The flat 1.39% excise tax on a private foundation’s net investment income is replaced with a tiered system based on the foundation’s asset value. This new structure imposes higher rates for larger endowments, potentially reaching up to 10% for the largest foundations. This is a significant change aimed at generating revenue, and critics argue it could reduce funds available for charitable grants.
Effective Date: This provision impacts private foundations with assets exceeding $50 million and takes effect for taxable years beginning after December 31, 2025.
Reduced Burden on Foundations
While the final bill includes the tiered excise tax, some more stringent provisions that were initially feared did not make it into the final version. These included potentially higher tax rates on investment income and stricter rules for excess business holdings. This indicates a slightly less severe outcome for foundations than some initial proposals suggested.
Effective Date: This isn’t a “change” with a specific effective date, but rather an outcome of the legislative process.
Potential Net Loss in Charitable Dollars
While not directly a change to private foundations, the broader OBBB changes regarding charitable deductions can indirectly impact them.
New floors on deductions for itemizing individuals (0.5% of AGI) and corporations (1% of taxable income), coupled with a 10% cap on corporate donations, could potentially reduce overall giving from high-income donors and corporations. This might lead to a decrease in charitable revenue for nonprofits, including those funded by private foundations.
Effective Date: These new floors and caps on charitable deductions generally take effect for taxable years beginning in 2026.
In essence, private foundations will face a new, higher, and more complex tax on their investment income starting in 2026, though the extent of the impact will depend on their asset size. This comes within a broader context of changes to charitable giving incentives that could affect the overall philanthropic landscape.
Questions?
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