Focus on Foundations: Charities Feeling the Pain of Economic Downturn

[View All]

Focus on Foundations: Charities Feeling the Pain of Economic Downturn
November 1, 2010
From the November 2010 Riker Danzig Tax and Trusts & Estates UPDATE
Area(s) of Practice:
Estate Planning & Administration, Tax Law

As a result of the economic hardship our communities have been experiencing recently, many public charities have been forced to close their doors, merge with other organizations or dissolve entirely, abandoning the charitable causes they championed for so many years.

GuideStar, the nonprofit charitable monitoring organization, conducted a survey in June, 2010 to try to gauge the effect of the downturn in the economy on the American nonprofit sector*. The survey showed that many organizations that rely largely or in part on reimbursement for services from state and local governments were experiencing cash flow issues due to delays in payments and were facing upcoming state budget cuts. Many of these charities provide basic public and social services in local communities (e.g., mental health assistance, shelter and rehabilitation facilities, food and nutrition programs, libraries, etc.). Local communities are now at risk of losing these services due to insufficient funding. In addition, many other smaller charities are struggling to continue to operate due to the loss of donations from individuals and from corporate contributors (e.g., employer matching programs, corporate sponsorship, etc.).

These charitable organizations have seen an increased reliance on private foundation grants. As the year end approaches, we urge our private foundation clients to take a special look at those charities that may be struggling to continue in your local community.

As our private foundation clients know, private foundations are required to meet an annual contribution payout requirement. The payout requirement is the minimum amount that a private foundation must spend each year for charitable purposes. This amount is paid in the form of qualifying distributions, which include grants, expenses incurred for direct charitable activities, assets acquired directly for the active conduct of exempt functions, and, within certain limits, the administrative cost of making grants. In general, a distribution to a qualified public charity is a qualifying distribution.

Generally, a private foundation must meet or exceed the annual payout requirement of 5% of the average fair market value of its net investment assets in order to avoid paying excise taxes. These payments must be completed before the end of the succeeding tax year, but they can certainly be made earlier than this (e.g., as early as the beginning of the taxable year). If the 5% test is not met at the end of this distribution period, the IRS may impose a 100% tax on the applicable required payout amount.

Private foundations might consider making their required distributions earlier than they might otherwise have done in the past, especially if they are aware that the operating charities they would like to benefit are experiencing cash flow problems. These important community organizations, and those in the community that they serve, would certainly welcome the support.

*See The Effect of the Economy on the Nonprofit Section, A June 2010 Survey,