The 5% Minimum Distribution Requirement

Private non-operating foundations must distribute a minimum amount for charitable purposes each year. The requirement is designed to ensure charitable assets are actually deployed rather than accumulated indefinitely.

Calculating the distributable amount

The starting point is generally 5% of the average fair market value of non-charitable-use assets, adjusted for the excise tax on net investment income and certain other items.

Qualifying distributions

Not every payment counts toward the requirement.

• Grants to qualifying charitable organizations
• Reasonable and necessary administrative expenses for charitable activities
• Amounts paid to acquire assets used directly in carrying out exempt purposes

Timing and shortfalls

The distributable amount for a year generally must be distributed by the end of the following tax year. Undistributed income can trigger an excise tax under Section 4942, with an additional tax if the shortfall is not corrected.