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The Failure of Private Foundations to Qualify for a Fifty-Percent Tax
Rate Reduction
Timothy R Yoder,
Mississippi State University
Brian P McAllister, University of Colorado at Colorado Springs
ABSTRACT: This study examines the tax on net investment income of private foundations. Private foundations pay a 2 percent tax on their net investment income, but can reduce this rate by 50 percent by distributing greater than a minimum amount calculated as a function of the foundation’s historical distribution ratio and non-charitable-use assets. Forty-three percent of sample foundations fail to qualify for the lower tax rate. We find that foundations are more likely to pay the 2 percent tax when non-charitable-use assets and/or their historical distribution percentage increase. We also find that foundations are less likely to the pay the 2 percent tax when non-charitable-use assets decrease, the potential tax savings are larger, and the foundation is professionally managed. Finally, foundations that paid the 2 percent tax rate in the prior year are 3.5 times more likely than other foundations to pay the 2 percent tax rate in the current year.
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