Author: David Miller, CFP®, CPA, Managing Director at Clearstead

The 2020 Appropriations Act simplified the calculation of Net Investment Income Tax for private foundations subject to this excise tax. Previously, these foundations were subject to either a 1% or 2% tax rate on their net investment income. The lower rate was imposed so long as charitable distributions made during a year as a percentage of total assets equaled or exceeded the foundation’s five-year rolling average distribution ratio. The higher rate was paid if the ratio of distributions to assets during a given year was less than the rolling average ratio. Net investment income is simply the portfolio income earned by the foundation reduced by expenses allocable to earning such income.

The new law, which became effective for taxable years beginning after 12/20/2019, imposes a flat 1.39% excise tax on net investment income with no consideration given to the ratio of distributions paid to total assets. This change eliminates the penalty suffered by foundations that had a spike in distributions paid during a previous year which increased their five-year rolling average distribution ratio. Such foundations had to maintain a higher rate of distributions in subsequent years if they wished to maintain the benefit of the lower 1% excise tax rate. The alternative was to reduce their distribution rate to standard levels and suffer the burden of the 2% excise tax rate for five years until the rolling average distribution ratio returned to its historical level.

The requirement that certain private foundations pay out at least 5% of their total assets each year has not changed as a result of this new law. However, the law change did eliminate the need for these foundations to manage their charitable distributions in relation to their five-year distribution ratio.


Information provided in this article is general in nature and is provided for informational purposes only. These materials do not constitute an offer or recommendation. The views expressed by the author are based upon the data available at the time the article was written and any such views are subject to change at any time. Clearstead disclaims any liability for any direct or incidental loss incurred by applying any of the information in this article.



At Clearstead, we create integrated, prudent, and custom strategies that bring clarity to you or your organization’s financial future.

Clearstead is an independent financial advisory firm serving wealthy families and leading institutions across the country. As a fiduciary, it provides wealth management services and investment consulting to help clients meet their financial objectives, achieve their aspirations, and build stronger futures.




1100 Superior Avenue East
Suite 700 | Cleveland, Ohio 44114