Administration’s 2025 Revenue Proposals – Potential Changes for Private Foundations

On March 11, 2024, the U.S. Department of the Treasury released the “General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals,” which is a 256-page explanation of the Biden Administration’s fiscal year 2025 budget. 

The Green Book contains the administration’s policy priorities and recommendations to Congress for spending and taxation. Within the many recommendations, there are two changes proposed specific to private foundations:

1. Limit use of donor-advised funds to avoid a private foundation payout requirement; and,
2. Exclude payments to disqualified persons from counting toward private foundation payout requirement.

Private nonoperating foundations are generally required to annually distribute at least 5% of the total fair market value of their non-charitable use assets from the preceding year. A foundation that fails to meet this minimum distribution requirement is subject to a 30% excise tax on the undistributed amount.

Typically, qualifying distributions include amounts paid to accomplish religious, charitable, scientific or educational purposes, as well as reasonable and necessary administrative expenses paid by the foundation to further its charitable purposes.

Private foundations are, generally, allowed to pay compensation and reimburse expenses for personal services to a disqualified person that are reasonable and necessary to carry out the foundation’s exempt purpose. These payments are currently included in the consideration of the minimum distribution requirement.

A distribution by a private foundation to a donor-advised fund (“DAF”) is generally considered a qualifying distribution. Currently, there is no requirement that amounts held in a DAF be distributed within a set period of time.

The Green Book proposes that a distribution by a private foundation to a DAF is not a qualifying distribution unless (a) the DAF funds are expended as qualifying distributions, excluding a distribution to another DAF, by the end of the following year and (b) the private foundation maintains adequate records or other evidence showing that the DAF has made a qualifying distribution within the required time frame.

The second Green Book proposal affecting private foundations provides that paying compensation or reimbursing expenses by a private foundation to a disqualified person (other than a foundation manager of such private foundation who is not a member of the family of any substantial contributor) is not a qualifying distribution that satisfies the payout requirement. 

Both of these proposals would be effective after the date of the law enactment.

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