Payout Requirements: Year-End Tips for Meeting Your Minimum - Exponent Philanthropy
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Payout Requirements: Year-End Tips for Meeting Your Minimum

Photo by Tima Miroshnichenko

A private foundation must make annual charitable expenditures, called qualifying distributions, equal to at least 5% of the fair market value of its previous year’s endowment. Thus, a foundation with average assets of $5 million in fiscal year 2022 must make roughly $250,000 of qualifying distributions by the end of its next fiscal year, or December 31, 2023, if it follows a calendar year.

It’s important to note that while we tend to use the term payout when referring to the minimum distribution rules, this is admittedly misleading. Payout suggests grants or contributions paid out to other charities, but the tax code does not actually use the word payout. Most foundations do meet the distribution requirement through grants and contributions, but many other expenses count toward the minimum distribution requirement, as well.

Making Qualifying Distributions

Each year, private foundations must meet their minimum distribution requirement through qualifying distributions made to accomplish a charitable purpose. Pledges are not qualifying distributions. Only actual expenditures of cash or property count.

According to federal tax law, qualifying distributions include:

  • Most grants for charitable purposes to public charities, noncharities, and eligible individuals (e.g., scholarships) if following specific IRS rules. One important exception is the case of grants to certain supporting organizations
  • Reasonable administrative expenses necessary for conducting a foundation’s charitable activities (e.g., staff salaries, insurance, training, travel, rent)
  • Direct charitable activities (e.g., providing technical assistance, conducting research, publishing reports)
  • Qualified set-asides with IRS approval; in such cases, the IRS determines the charitable merit of accumulating money or property for a specific long-term project (e.g., constructing a building, launching a research program)
  • PRIs, which are investments made by foundations with the primary purpose of accomplishing charitable goals, not producing income (e.g., below-market loans to an environmental group, stock investments in a minority-owned bank)

The following expenses do not count as qualifying distributions:

  • Expenses related to ongoing investment management, such as investment consultant fees, custodial fees, or fees for attending investment conferences
  • Portions of salaries or meeting expenses related to overseeing investments
  • Purchase of assets used to conduct and manage investment activity (e.g., new computer to track investments, office space for staff monitoring investments)
  • Expenditures made to correct prior years’ deficiencies
  • Grants to certain supporting organizations; while the IRS allows these grants if foundations exercise expenditure responsibility, they will not count as qualifying distributions under any circumstances

Tips for Meeting Your Payout Requirement

It’s November and your foundation wants to fulfill its payout requirement within the calendar year. What can you do?

  • Ask your local community foundation, association of grantmakers, or giving circles for information about community needs and nonprofits they support.
  • Consult with members of the faith community.
  • Ask your government social services agencies, United Way, or other federated campaigns for recommendations of nongovernmental, nonprofit agencies with whom they work.
  • Ask at your workplace. Does your employer have a matching grants program or a corporate foundation?

For trustees with discretionary grant dollars, here are additional ideas for efficient spending at year’s end:

  • Fund a declined grant that you believe in.
  • Look for an opportunity to respond to emergency needs in your community (e.g., short-term cash flow problems, greater needs during the winter months).
  • Give to a natural disaster relief fund.
  • Give to an alumni association.
  • Contribute to summer camp tuition for low- and moderate-income children (e.g., YMCA, YWCA, The Fresh Air Fund).
  • Make online donations (a particularly useful strategy for international giving).
  • Give to holiday food programs or food baskets.
  • Open a certificate of deposit, or CD, at a community development bank.

Giving Beyond the Minimum

Although most U.S. foundations do distribute roughly 5% of their assets each year, planning to exist in perpetuity, some foundations routinely give more than 5%—either intentionally spending down or varying their giving by project or need.

Some foundations find that adjusting their payout rates to something other than 5% allows the foundation to give with greater impact by filling critical gaps, responding to pressing needs, or taking advantage of current opportunities. Other donors are simply motivated to give while living.

As the number of foundations continues to rise, new and younger donors enter the philanthropic landscape, and donors look for innovative ways to address tough social issues, approaches to distributions and attitudes about perpetuity are sure to become more varied.

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