Foundations look for 50% tax cut

Presently, the IRS provides private foundations a tax break if they show a trend of exceeding qualifying distribution requirements (grants). The legislative intent is for the tax reduction to serve as an incentive or reward for those foundations that are more generous with their grants over a five-year period than the 5 percent minimum distribution required by law.  The Council of Foundations wants all philanthropists to get the tax break regardless of the trends in their generosity and disbursements.  Four senators apparently agree with the council as they have included the provision in S. 1343, the recently introduced bill addressing several tax provisions dealing with charitable giving. The bill was introduced by Sens. John Thune (R-S.D.) and Bob Casey (D-Pa.), both members of the tax-writing Senate Finance Committee, with Sens. Pat Roberts (R-Kan.) and Ron Wyden (D-Ore) as co-sponsors.

The proposed bill also expands the IRA charitable rollover to include distributions for donor-advised funds (DAF). DAF are charitable donations to community foundations or, more commonly, to holding companies that allow the donors to attach directives that can last as long as the funding does. The DAF mechanism has grown in controversy since its rapid acceleration of use in the 1990s because, in part, there are no requirements for how quickly the donated funds are to be disbursed. Describing DAF as “charitable savings accounts,” the National Philanthropic Trust , one of many organizations that manages DAFs, states donor-advised funds already “offer the most advantageous tax deductions of any charitable giving vehicle.”

With DAF’s savings account structure and micro-managing nature, critics also are concerned about DAF possibly cannibalizing other traditional charitable giving. This could be particularly true for community foundations, hampering the resources and flexibility they have to address the most critical and always changing needs of their service region.  As more foundations move into supporting entrepreneurship, innovation and impact investing, the restrictive nature of DAF could become even more problematic if tax policy encourages greater use of the tax avoidance tool.