Friday, October 28, 2011
Private Foundation Tax Planning
Posted by John Panetta
With the uncertain political climate in Washington around deficit reduction, including one proposal to lower the charitable deductions cap, it is inclear when the best time may be to set up a charitable vehicle until the tax horizon is clearer.
However, it makes sense to start a private foundation today, even if it means funding it next year. Here’s why:
Instead of waiting to see what happens in Congress, you should form your private foundation in 2011 and stay flexible and ready to fund (and receive a 2011 tax deduction) if legislation is passed this year. A foundation formed this year is optimally positioned to reduce its tax rate by 50% if it remains unfunded until 2012, or is funded this year, but makes no grants and pays no administrative expenses until next year.
All private foundations pay excise taxes: either 2% or 1% on income and realized net capital gains. Since private foundations never qualify for the 1% tax rate in the year they are formed, smart philanthropists form it now and retain the option of funding it later for maximum flexibility paired with maximum tax savings.
Savvy planning means more money for charitable causes. If your private foundation makes grants or pays administrative expenses next year equal to or greater than 1% of its 2011 net-investment income, the private foundation qualifies for the lower tax rate. This is crucial for individuals planning to gift securities or other appreciated capital assets prior to diversifying their portfolios.
Now is a perfect time to finalize your tax planning for 2011. Armanino McKenna has several tax and prviate foundation experts who are willing to help!
John has more than 30 years of experience providing tax-exempt organizations with a wide variety of tax, business and consulting services including income tax planning, IRS/state tax audit representation, intermediate sanctions planning and compliance, reorganization planning and consulting, unrelated business tax planning, assistance with legislative activity, multi-corporate transaction planning, and private foundation domestic and foreign expenditure planning. John joined the firm from Burr Pilger Mayer. Previously, he led the Western Area Exempt Organizations Tax Practice for both PWC and KPMG. He has also served with the Exempt Organizations Branch of the IRS National Office.