Understanding Foundation Administrative Expenses
From a tax law perspective, private foundations are allowed to pay “reasonable and necessary” administrative expenses without incurring penalty taxes. These expenses also count toward the foundation’s annual distribution requirement, provided they meet certain criteria.
What Qualifies as an Administrative Expense?
To be considered an administrative expense, the cost must fall into one of these categories:
- Related to the foundation’s charitable purposes
- Related to its investments
- Payments of taxes
Examples of administrative expenses typically include costs directly tied to grants, charitable programs, and program-related investments. Common examples are:
- Salaries and benefits for staff
- Rent and utilities
- Travel expenses for program-related activities
- Training and development costs
- Office expenses like photocopying
Expenses That Cannot Be Included
Certain costs related to ongoing investment management cannot be counted toward the foundation’s annual distribution requirement. These include:
- Investment consultant and custodial fees
- Attendance at investment-focused conferences
- Salaries or other administrative costs tied specifically to ongoing investment management
However, the initial costs of purchasing an asset may qualify as an administrative expense. Foundations should carefully document and exclude portions of salaries or other expenses related to ongoing investment management activities.
Disclaimer: While we pride ourselves on our advice, please realize Exponent Philanthropy is not a law or accounting firm. This information contained in this Q&A is being provided for informational purposes only and not as part of an attorney-client relationship. The information is not a substitute for expert legal, tax or other professional advice tailored to your specific circumstances, and may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code. It is our advice that you seek independent counsel, for any tax, accounting or legal issues you may have, related to matters that are of a material concern to you or your organization.
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