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Strategic
Source Online
December 2004
Alert: It’s Calendar Year End and, for Many Foundations, Fiscal Year End
Don’t forget some important points.
- If a donor has contributed to the foundation this year (even the founder), a receipt is required to support the donor’s income tax deduction. This is the same rule that applies to gifts to public charities, but is often overlooked by private foundations.
- Make sure the foundation has met its minimum distribution requirements. This is the well-known 5% test, but remember that it applies to the average value of its investment assets. The payment is due no later than 12 months following the year end. This rule has some nuances:
- The 5% test applies to investment assets, not exempt function assets. So, if the foundation is using some of its assets directly for charitable purposes (like a private operating foundation’s museum), these assets are not included in the calculation. The investment assets are also reduced by a reasonable cash reserve (which is presumed to be one and one-half percent of the investment assets, even if the actual cash amount is less)
- This doesn’t prevent a foundation from paying out more than the minimum, nor does it prevent the foundation from paying in the current year. Excess distributions can be carried over and reduce future minimum distributions.
- The 5% payout requirement can be reduced by the expenses directly related to the grant making process (this would preclude expenses related to the investments, for example).
- If this is a short taxable year for the foundation (perhaps because it’s the first year, or it has changed fiscal years), the 5% is prorated. The percentage is calculated by dividing the number of days in the foundation’s year times by 365 and multiplying the result by 5%.
- The 5% is further reduced by any excise or income taxes paid during the year.
- If the grant is going to another private foundation, instead of a public charity, it will count towards the minimum distribution only if the grantee distributes it out within the next fiscal year, over and above such grantee’s own minimum distribution requirements. The grantor organization must exercise “expenditure responsibility” over the funds if the grant is made to an organization other than a public charity
- Foundations are taxed on their net investment income. This is called an excise tax, and the basic amount is 2%. Net investment income can be reduced by offsetting capital losses with capital gains and you can avoid the recognition of gain by distributing appreciated securities to the grantee instead of cash. The 2% tax can be lowered to 1% if the foundation’s qualifying distributions equals or exceeds a prescribed formula amount. Be sure to run the calculation annually, if your distributions are greater than the 5% required.
- Excise taxes are required to be paid in quarterly estimates if the prior year’s tax was $500 or more. The payment is due by the 15th day of the fifth, sixth, ninth, and twelfth month of the foundation’s fiscal year. Large foundations with annual income of $1 million or more can base the first quarterly payment on the prior year’s tax, but must thereafter use actual income for the second, third, and fourth installments.
Special Training and Education in Foundation Management
If you are a founder, director, or trustee, foundation manager, or an advisor who regularly consults with foundations, then you should attend the Foundation Management Certificate Program, offered by IFF Advisors, Inc., and the Fielding Graduate University. This program provides the most comprehensive, hands-on and practical training available in the country.
The curriculum is offered in three distinct modules, each of which is offered over a weekend with a two-day face-to-face group meeting that includes both lecture and small group work, followed by a six week on-line facilitated discussion. Nationally recognized experts at IFF will share their knowledge and skills during each module, while Fielding’s experienced Human & Organization faculty will facilitate the on-line follow-up discussions. Combining rigorous reading and preparation with case studies and field work, this certificate program provides an exciting combination of scholarship and real life experience, designed to enhance the effectiveness and efficiency of foundation management, and to respond to the unique challenges of family philanthropy.
Students will learn how to identify and select appropriate foundation structures and governance systems, develop comprehensive long-range strategic plans, interview and evaluate investment advisors and managers, and design administrative and grant management systems. They will experience the challenges of family dynamics and learn skills and strategies to respond. Students will also learn how to develop the foundation’s mission and vision, design grant criteria and procedures, and establish methods of monitoring and evaluating grants.
Upon completion of the program, students will receive a Certificate from the Fielding Graduate University. The certificate program begins on January 23 and runs through the end of July. Interested parties should contact Judith Stevens-Long, Ph.D. at Fielding Graduate University jslong@fielding.edu.
 Fielding Graduate Institute: Register Today!
Legislative Update: California Enacts Sweeping Legislation
California has enacted sweeping legislation that affects California nonprofit organizations, including private foundations. It follows in the wake of the federal Sarbanes-Oxley legislation which was applicable to large public corporations. Known as the Nonprofit Integrity Act of 2004, some provisions apply to all nonprofits and foundations, and some apply only to the large organizations. Here are some key provisions. Similar activity is underway in several other states, including Massachusetts and New York. We’ll cover more in the next issue of Strategic Source Online.
Key provisions applicable to all foundations and charities, regardless of the organization’s revenues:
- Financial Statements. If a foundation or charitable organization prepares audited financial statements, such statements are subject to inspection by the Attorney General and the public.
- Officer compensation. The boards of directors and trustees of charities and foundations of all sizes are required to review the compensation and benefits paid to the president (or CEO) and the treasurer (or CFO), to be sure that it is reasonable. The reviews must occur upon hiring or renewal of the officer, or if the compensation is being modified, unless the modification applies to substantially all the employees.
- Registration. Foundations, whether a corporation or a trust, must register with the Attorney General within 30 days (instead of six months under prior law) after they first acquire or accrue assets.
Key provisions applicable to foundations and charities with gross revenues of $2.0 million or more:
- Organizations affected. All foundations, including corporations and trusts, as well as public charities, commercial fundraisers, and fundraising counsel. Certain types of charities, such as educational institutions, religious organizations, and hospitals are exempt from much of the new Act.
- Financial reporting. Annual financial statements must be prepared using generally accepted accounting principles. These statements must be made available for inspection by the state’s Attorney General and the public, no later than nine months after the end of the fiscal year.
- Audit requirements. Financial statements must be audited, using an independent certified public accountant in conformity with generally accepted auditing standards.
- Audit Committee. The board of directors, or a committee appointed by the board, of a charitable corporation, and the trustees of a charitable trust are responsible for hiring and firing auditors, and for reviewing and approving completed audits. Audit committee members may include directors or other persons, but cannot include staff. Committee members may not be paid for this service, nor may they have any material financial interest in any entity doing business with the corporation.
Penalties for Non-Compliance
- Late fees. If the foundation fails to comply with the annual reporting and annual registration renewal requirements, there may be late fees.
- Civil penalties. Other failures to comply may result in civil penalties.
California Registry of Charitable Trusts:  Guide to the Nonprofit Integrity Act of 2004.
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