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Minimum Distribution Requirements (IRC Section 4942)

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Minimum Distribution Requirements (IRC Section 4942)

A private foundation must pay out each year an amount equal to 5% of its net investment assets in "qualifying distributions". Qualifying distributions are defined as:

  • Actual grants to qualified charities;
  • Necessary and reasonable administrative costs to make those grants (Note: For the purposes of meeting the minimum distribution requirements, these administrative costs are capped at .65% of the fair market value of the net investment assets.);
  • Costs to provide direct charitable activities; and,
  • Costs to acquire assets used in the conduct of the private foundation's exempt activities.

Failure to meet the minimum distribution requirement will result in a penalty tax assessed on the undistributed amount.

Amount of the tax:

  • Excise tax of 30% of the undistributed amount
  • Additional excise tax of 100% of the undistributed amount is imposed if the foundation does not make up the deficiency within 90 days of receiving notification about the deficiency from the IRS