The Math Behind the Tax: How Proposed Private Foundation Tax Increases Could Reshape Grants to Nonprofits

On May 22, 2025, the House of Representatives passed the “One Big Beautiful Bill Act,” which includes a significant change to how private foundations are taxed on their investment income. While the conversation continues in the Senate, we wanted to examine how the proposed increases to the excise tax on net investment income would alter the financial landscape for America’s private foundations.

Understanding the effect on philanthropy requires examining both the mechanics of the proposal and its potential ripple effects throughout the charitable sector. Our analysis shows that the change does not necessarily alter foundation spending from endowments in the short term, but it does redirect some of the money. In the medium- and long-term, however, money directed from foundations to nonprofits could decrease 3% to 15%, and potentially more, depending on several assumptions.

In addition, the decisions private foundations may make to counteract the decrease in distributions to nonprofits are not as straightforward as they first seem.

Understanding the current law

Under current law, private foundations pay a 1.39% excise tax on their net investment income (NII)—that is, income derived from interest, dividends, and capital gains—a relatively straightforward system that has been in place since 2020. To be very clear in plain language, this is not a tax on the balance of the endowment itself, but rather a tax on the earnings of the endowment.

Foundations cannot count this payment toward their required distributions to charity. However, they are allowed to subtract the excise tax amount from the strict 5% distribution requirement, which slightly reduces the required grant payout. This fact will be very important in this analysis.

Current proposal based on text of the bill passed in the U.S. House of Representatives

The current proposed increase – what is included in the version of the bill passed by the U.S. House of Representatives – would replace this flat rate with a four-tiered system based on foundation asset size (see Section 112022 of the bill):

Foundations with assets under $50 million: 1.39% (no change)
Foundations with assets between $50 million and $250 million: 2.78% (a 100% increase)
Foundations with assets between $250 million and $5 billion: 5% (a 260% increase)
Foundations with assets over $5 billion: 10% (a 619% increase)

In addition to the new tax rate, this proposal includes two other notable changes: 1) the bracket that determines which rate is paid is based on the total foundation assets—furniture, computers, chairs, etc.—not just the value of the financial instruments held by the foundation, and 2) assets of “related organizations” will be treated as assets of the private foundation for purposes of determining the tax rate.

For the analysis and simplified example below, we have ignored the second change. In addition, our analysis found that the first change has little meaningful implication for most foundations; most endowments represent 90% or more of the value of total private foundation assets.

Again, to be very clear, the four new tax rates are still applied to the same artifact as has been the case since 2020: the earned NII, not the endowment itself.

Effects on Private Foundations

When the proposed tax increases were announced, the Philanthropy Roundtable and the Council on Foundations quickly released statements opposing this change. Recently, United Philanthropy Forum published an analysis of how these changes would affect different sizes of foundations and states. All three groups noted that the increase in taxes would decrease charitable distributions from private foundations.

However, none of the statements explained how this reduction would occur or noted how foundations might make different decisions in the short-term versus long-term horizons.

A Brief Model

Six lines of any private foundation’s 2023 or later IRS Form 990-PF show why the tax increase will likely decrease distributions to nonprofits:

the NII is shown on Part I, line 27b;
the resulting (current) 1.39% tax on that NII is shown on Part V, line 1a;
the endowment is shown on Part IX, line 5, and the minimum 5% payout is calculated on line 6; and
the tax on NII is subtracted from the minimum 5% payout in Part X, line 2a, resulting in a new adjusted minimum distribution amount to nonprofits in line 7.

Let’s use a $100 million private foundation as an example.

To generate the figures in Table 1, we randomly selected 10 private foundations with assets between $50 million and $250 million and calculated the group average for rows 1 and 3; the rules of the Form 990-PF were applied to calculate rows 2, 4, and 5. (For a full explanation of our methodology, see the Technical Appendix.)

In plain language, the reported NII of this group of 10 foundations averaged $9.3 million (row 1), which, at the current 1.39% tax rate equates to a tax of approximately $130,000 (row 2).

This model foundation was required to distribute at least 5% of its $100.4 million endowment to nonprofits in the initial calculation, or just over $5 million (row 3). That figure is revised downward to $4.9 million (row 4), primarily because the amount of tax on NII (row 2) is subtracted from the initial 5% calculation (row 3).

Increasing the tax to 2.78%, which causes a $129,252 increase in tax paid, lowers this model foundation’s required distribution to nonprofits by $129,252, exactly the amount of tax paid. Repeating this analysis reveals the same effect for the 5% and 10% tax rate: every dollar paid in tax decreases the required distribution to nonprofits by the same amount.

Implications for Distributions to Nonprofits and Health of Private Foundations

In its May 13, 2025, analysis, the Congressional Joint Committee on Taxation estimated that this proposal would increase federal tax revenues by $15.9 billion over the ten-year period 2025-2034. Clearly, therefore, the most immediate effect would be an increase in federal tax revenue — and the conclusion above suggests we can also assume there would be a $15.9 billion decrease in private foundation distributions to nonprofits.

However, the secondary effects on private foundation distributions to nonprofits present a more complex picture. While economic theory suggests that taxing something typically results in less of it, the impact of the new tax rates will not necessarily be immediate or dollar-for-dollar.

Foundation payouts: Expect short-term stability

On the one hand, the increased tax rates clearly redirect where some of the required 5% distribution is paid. Using the $100 million model private foundation above:

In the current situation, the $5,024,378 required distribution is $129,252 in tax and $4,895,126 to nonprofits.
Under the proposed tax, the $5,024,378 required distribution is now $258,504 in tax and $4,765,874 to nonprofits. Federal revenue clearly goes up, and the distribution to nonprofits goes down compared to the current situation.

On the other hand, many private foundations work with multi-year grant commitments and have strategic plans that will not change simply because of the new tax. Therefore, in the short term, many foundations will likely increase the distributions from their endowment to maintain current commitments. In essence, they will distribute $4.9 million to nonprofits, not just the $4.77 million required, leading to short-term stability in distributions.

Foundation payouts: Expect long-term changes

However, over time, foundation distributions are likely to decrease as boards review “excess” distribution policies above 5% due to policy and mathematical considerations:

Policy: For every dollar the foundation distributes above the 5% requirement, they are dipping deeper into the endowment, which has implications for any foundation operating on a perpetual basis.
Mathematics: Because every dollar of tax, by IRS definition, decreases the required payout by a dollar, the effect is magnified for every step above the 5% required minimum. The small foundations used in the modeling exercise above, for example, actually distribute 15% of their endowment, or nearly 3 times as much as the required 5% minimum. Therefore, every dollar decrease in the required minimum also causes a 3-fold decrease in the foundation’s actual distribution for the smallest foundations. (See the Technical Appendix for further explanation of this magnifying effect.)

Therefore, in the medium- and long-term, the increase in taxes could result in a decrease in private foundation distributions to nonprofits from -3% to -15% compared to the current adjusted required distribution, and by -32% to -67% if all foundations over time decrease from their actual payout rate and instead anchor on a more strict 5% payout rate. Table 2 below shows the final results of the calculations using the same process as the example above. (See the Technical Appendix for the full example, by line, for model foundations B and C.)

It is important to remember that smaller foundations, much like smaller donor advised funds, frequently have higher payout rates than their larger peers — just like the modeled foundations displayed in Table 2 above.

However, while smaller foundations compose the majority of all foundations by number, the small number of very large foundations contains the majority of foundation assets and therefore will pay the majority of this new tax at the highest 10% rate. For example, the United Philanthropy Forum estimates that the largest 27 foundations with assets exceeding $5 billion will pay 64% (or $ 1.9 billion) of the $2.9 billion in estimated taxes in the first year, based on 2023 IRS Form 990-PF filings.

Mind the gap: Moving up in brackets

Today, few foundations fall within 5% of one of the thresholds that trigger a new tax rate ($50 million, $250 million, or $5 billion). Therefore, moving between tax rates is not a concern for nearly all foundations either this year or next year. However, over time, more foundations will move upwards in brackets based on investment returns.

As foundations approach the break points now or in the future, there will be a temptation to restructure their holdings or operations to avoid (or at least delay) the move into the next bracket.

For example,

A $249 million private foundation started by a couple dedicated to companion service animals and elder care could become two separate foundations to avoid tripling its current tax rate: one $124.5 million private foundation dedicated to service animals, and a second $124.5 million private foundation dedicated to elder care.
Similarly, a $49.9 million private foundation could dissolve and become a $40 million donor advised fund and a new $9.9 million private foundation to avoid doubling its current tax rate.

New rates, new choices: Threats to Perpetuity

For those foundations that continue to distribute more than the required minimum, the tax increases the threat to perpetuity. Foundations that regularly pay out more than the required 5%—such as 6% or more—must do so by drawing down endowment balances more aggressively, by seeking higher investment returns, or by seeking new inbound contributions from the foundation’s founders. If the excise tax cuts further into income, those same foundations may face sharper declines in their endowments. This creates a potential downward spiral: less income, fewer outbound grants, and smaller endowment reserves.

For foundations intending to last forever, this is a non-trivial concern. For foundations that expect to sunset within the donor’s lifetime plus some number of years, this may be a much lesser concern.

What Comes Next

Of course, everything we know about the current proposal represents merely three pages in a 1,038-page item of legislation that cleared the U.S. House and awaits review, debate, and amendments in the U.S. Senate.

As discussions continue, stakeholders should watch closely for changes in:

the dollar value of assets where each new tax rate takes effect,
the rates themselves,
the effective date of the changes,
the duration of the changes (that is, is a sunset date included?), and
any changes to additional considerations, such as the use of “all” assets and the aggregation of assets of related entities in the process of calculating the appropriate tax rate.

Bottom Line

While the details continue to evolve, the core policy question remains: Is the additional federal revenue generated by these tax increases worth the likely reduction in private foundation grants to nonprofits – and thus the reduction in services or other resources available to people in communities? Mathematics suggests that higher taxes on foundation investment income will, over time, result in less money flowing to nonprofits and charitable causes and the community needs they address. This trade-off deserves careful consideration as Congress weighs competing priorities.

For foundations currently planning their strategies, the uncertainty itself presents challenges. Whether or not this specific proposal becomes law, foundation boards and staff would be wise to model various scenarios and consider how potential changes might affect their long-term grantmaking strategies and community impact.

The coming days, weeks, and months will provide crucial clarity on whether this proposal advances, but the broader conversation about philanthropy’s role in addressing societal challenges — and how tax policy shapes that role — is likely to continue well beyond this legislative cycle.

For more information detailing our methodology and analysis, please see the Technical Appendix. Johnson Center Research Associates Anneliese Orr and Jason Entingh contributed to this analysis.