10 Foundation Activities That Call For Additional Care

Private foundation trustees and staff oversee countless activities, from setting direction and selecting grantees to reviewing policies and investing assets. Several foundation tasks—some mandatory, some voluntary—call for additional care.

All are worth your careful consideration to help you be financially savvy and legally compliant, and to help you take full advantage of your foundation’s flexibility.

Reducing your excise tax

Foundations must pay a small excise tax on net investment income each year. The tax is currently 2% of net investment income minus certain expenses, although it is possible to qualify for a 1% rate if, generally speaking, your current year’s expenditures exceed by 1% of net investment income your average expenditures over the past 5 years.

It is difficult for private foundations to qualify for the reduced rate every year without forever increasing their payout rates and depleting their assets, but many foundations miss the opportunity every few years. To see if a small increase in distributions would qualify you for the 1% rate, be sure to calculate your qualifying distributions a month or two before the year’s end. Some foundations accelerate their distributions to qualify.

Engaging in transactions with foundation insiders

Self-dealing rules prevent private foundations from entering into a broad range of transactions with foundation insiders, known as disqualified persons, unless specific exceptions apply. No topic within the private foundation rules raises as many questions and concerns as self-dealing, because the rules can be counterintuitive and the penalties steep.

To avoid self-dealing in all cases, be sure to understand the rules and take care when hiring or leasing space from foundation insiders, inviting guests to galas or fundraisers, paying personal pledges, compensating trustees and staff, and paying for family travel with foundation funds—activities that lend themselves easily to self-dealing. Consult knowledgeable legal counsel before engaging in any transactions with insiders.

See Exponent Philanthropy’s publication How to Avoid Self-Dealing >>

Choosing alternative investments

A relatively new class of investments, known as alternative assets or alternatives, has become an increasingly popular way to address limitations in traditional equities and fixed income securities.

Alternatives offer a range of risk, return, and diversity and encompass a wide array of products, including hedge, private equity, real estate, venture capital, and commodity funds, and funds of funds. They may be limited partnerships, limited liability corporations, regular corporations, or trusts.

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What the Law Requires When Making Grants

By Andy Carroll, Exponent Philanthropy

Many people say the U.S. government imposes too many regulations and too much paperwork on our economy. Although everyone doesn’t feel this way, it’s a pretty common refrain.

One arena very free of government requirements is foundation grants to public charities. Yet many people who work in foundations and many professional advisors to foundations—attorneys, accountants, and consultants—are not aware of this freedom.

Project Streamline, an initiative of PEAK Grantmaking, is trying to get the word out. Several years ago, Project Streamline worked with legal experts to find out exactly what the IRS requires private foundations to do when making grants.

The answer might be shocking.

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WATCHING: Tax Reform Provisions With Implications for Philanthropy and Charity

U.S. CapitolBy Sue Santa, policy and legal consultant

For several years, we’ve been hearing promises of comprehensive tax reform. Both Congressional leaders and the Trump administration voice their commitment, and we’re told the President will release a plan soon. The President is slated to address Congress on February 28, so we may get signals then of what he has in mind. Congress too is fine-tuning its plan.

Congressional leaders aim for comprehensive tax reform to achieve several broad goals:

  • Simplify an overly burdensome and confusing tax code;
  • Lower rates and broaden the base (i.e., remove many deductions, loopholes);
  • Spur economic growth;
  • Level the playing field for U.S. corporations; and
  • Reinstate “fairness.”

Exactly how this will be achieved, at what cost, and whether those costs will need to be offset with tax revenues are issues that remain to be resolved. We also don’t know if a truly comprehensive overhaul—addressing both individual and corporate taxes—is achievable. It’s a monumental aspiration at a time when there’s very little agreement in Washington—in Congress, with the Administration, and within the political parties—beyond broad concepts. In the end, we might see slimmed back efforts.

With all this uncertainty, why should we be vigilant now? Don’t we have time? No, we don’t.

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Philanthropists Must Reset Government Leaders’ Expectations

By Sue Santa, legal consultant

Two weeks into the new administration finds both major political parties, as well as many of Washington’s systems, on uncertain footing.

Republican control of the executive and legislative branches has not automatically ensured a unified agenda; the President is not a typical Republican, and the House and Senate are not fully aligned on priorities. The slim Republican majority in the Senate means that a few votes cast outside of party lines can disrupt expected legislative wins. Adding to the uncertainty, many of the 600-plus federal appointments that come with a normal transition of administrations remain unfilled, putting government agency work plans on pause.

Despite the political tumult, the current administration already has provided considerable clues to its general direction (and even early action) to those of us who focus on the nonprofit sector: decreased federal expenditures on social programs. Recent actions toward repeal of the Affordable Care Act, the predilections of many secretary nominees, and the hiring freeze all point toward shifting priorities and shrinking federal budgets.

Government leaders, unfortunately, may be presuming that the nonprofit sector—and philanthropy generally—will step in to fill any vacuums in service or funding created from federal pull-backs. But these expectations do not align with the math. As David Callahan, writing in Inside Philanthropy, notes in his recent article, the nonprofit sector accounts for just 5 percent of GDP, and Americans’ annual donations to charity would fuel the federal government for only about 34 days. Nonprofit organizations, some of which rely heavily on government funds, would tell you that resources are already insufficient.

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What’s Your “Type”? Complex New Regulations Highlight Importance of Supporting Organization Classification

With careful due diligence, private foundation funders should be able to assess whether to give the green light to a supporting organization grant, or whether additional steps are necessary.

By Nancy McGlamery, Adler & Colvin

For funders, especially private foundations, the federal tax rules governing supporting organizations can be important. Grants by private foundations to certain types of supporting organizations are subject to expenditure responsibility and may not be counted toward the private foundation’s annual 5% minimum distribution requirement.

The complexity of the rules governing supporting organizations, updated on February 19, 2016, can be daunting, and most foundations need only focus on the “type” of a potential supporting organization grantee to determine if they must modify their grantmaking process or reporting with respect to the grant, or to consider whether to make the grant at all.

Please see below for some general information about supporting organizations and the new regulations. If you find yourself with questions about a grant to a supporting organization, we encourage you to seek legal counsel.

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Creative Grantmaking Done Legally

By Ruth Masterson, Exponent Philanthropy 

Your foundation can be extremely imaginative while still keeping its grantmaking straightforward. Or it can take full advantage of the tax code’s flexibility to make grants that are more complicated—and still perfectly legal. Our goal is neither to encourage you to stay simple or to get complicated with your giving, but to help you be aware of all the strategies at your disposal.

In fact, private foundations can make grants to almost anyone or any organization, including other private foundations and tax-exempt organizations, such as 501(c)(4)s, 501(c)(5)s, and 501(c)(6)s. Private foundations also can make grants to foreign organizations, individuals, unincorporated groups, and for-profit entities. You must just follow two steps: the grant must be for a charitable activity or project, and you must follow appropriate procedures as determined by the IRS.

Do speak with an attorney before taking on any of the “somewhat complicated” or “complicated” grants below, because there are nuances that are beyond the scope of this article.

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6 Ways Self-Dealing Can Creep Into a Foundation’s Work

By Sara Beggs, Exponent Philanthropy, with legal review by Ingrid Mittermaier, Adler & Colvin

The self-dealing rules for private foundations can—and do—trip up even the most seasoned and well-intentioned funders. Do you make it a point to review the self-dealing rules each year and seek out expert advice?

The general rule is this: Certain insiders known as “disqualified persons” are prohibited from engaging in a specific list of transactions with a private foundation, unless there exists a stated exception. If you are a board member, officer, or substantial contributor to a private foundation, you, your family members, and entities controlled by you must be cautious about any financial transactions with the foundation—even if they seem like a good deal for the foundation.

We asked attorneys at Adler & Colvin what self-dealing scenarios they encounter most, and we added additional ones based on the calls we field from our member foundations. The six examples that follow highlight specific self-dealing issues and suggest how to resolve them. Other self-dealing issues can be triggered in these scenarios that are not addressed here.

See additional examples in the full article (Exponent Philanthropy members only)

Get our 50-page primer “How to Avoid Self-Dealing”

  1. A trustee encourages the foundation to move its assets to the trustee’s high-performing personal money manager. When the foundation transfers its assets, the trustee’s personal management fees are cut in half, due to the increase in total assets under management. 

Why self-dealing? Foundations cannot make their income or assets available for the benefit or use of a disqualified person.

How to avoid self-dealing? Ensure the money manager understands the foundation’s assets are separate and that any fee reduction must be given to the private foundation, not the trustee. 

  1. A foundation hosts a board retreat in Florida where two board members live. The foundation pays all travel expenses for board members, including two additional hotel nights for those who want to extend their stay. 

Why self-dealing? Foundations cannot make their income or assets available for the benefit or use of a disqualified person.

How to avoid self-dealing? Ensure the foundation pays only for room nights necessary to attend the board retreat. All other expenses should be paid by the disqualified person directly to the hotel rather than reimbursing the foundation, which would necessitate a loan to a disqualified person.

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What I Learned About Advocacy

U.S. CapitolBy Lauren Kotkin, Exponent Philanthropy

What if you’re not good at accounting? Does that mean you get a pass on managing your foundation’s budget? Of course not.

Like accounting, advocacy is part of your job as a funder. This analogy was offered at Foundations on the Hill (FOTH), last month’s annual philanthropy advocacy days on Capitol Hill, hosted by the Forum of Regional Associations of Grantmakers in partnership with the Council on Foundations.

Walking the halls of Congress or even the local mayor’s office can certainly be intimidating. But keep in mind that philanthropy and government are a natural fit. Both parties are working toward the same end goal: robust support to help people and communities thrive.

Whereas Congress has placed restrictions on foundations in terms of lobbying for specific legislation, foundations can certainly speak to elected officials about issues important to them and their communities.

FAQs on foundation advocacy & lobbying

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20 Tips for Your Form 990-PF

By Akilah Massey, Exponent Philanthropy

Tax season will be here before we know it, and regulators estimate that at least 25% of all IRS Form 990-PFs have errors. Is your private foundation’s annual tax return among them?

Below are tips for private foundations from our primer Filing the Form 990-PF.

Part I

  • Column c—Most foundations should leave this column blank. Only private operating foundations and foundations with income from charitable activities use this column.
  • Line 2—If the foundation is not required to attach Schedule B, be sure to check the box.
  • Line 18—Reflect the foundation’s share of payroll taxes (e.g., Social Security, Medicare) here. Allocate any portion paid for the production of income to column b, and include only the charitable portion in column d.

Part IV

  • Column b—Be sure to indicate whether each security sold was purchased or donated.
  • Line 2—Make the best use of capital losses by using them to offset gains and decrease the excise tax on net investment income. Since losses cannot be carried backward or forward to other years, consider whether to strategically sell appreciated assets in the same year you will have losses.

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New Regulations Spotlight Nonprofit Overhead

By Henry Berman, Exponent Philanthropy

It’s January in Washington, DC, and there is no shortage of pundits, politicians, and pollsters with wisdom as to what the 114th Congress and President Obama will do, or try to do, in the coming year. As philanthropists faced with funding opportunities today, we are likely better served by looking back and taking notice of a real change in regulations that took effect last month. The change could – and should – have a significant impact on all of us who make grants.

The federal Office of Management and Budget (OMB) issued new regulations that rewrite the book on federal grantmaking in ways that will transform the relationship between nonprofits and governments at all levels – federal, state, and local.

The new rules mandate that nonprofits hired by government to provide services must be paid for the indirect costs they incur in doing so. In simple terms, OMB is declaring that nonprofits have overhead and administrative costs that should be paid. Kudos to OMB for recognizing the need to cover these costs that many of us as funders are called upon to help cover, effectively subsidizing what governments have, until now, refused to pay.

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