When the U.S. government grants a private foundation tax-exempt status, it expects the foundation to use its money to do good for society. To make sure that happens, the government requires the foundation to spend at least part of its assets each year for charitable purposes. That rule is called the payout requirement.
Foundations pay that amount in the form of qualifying distributions, most of which will be grants. Within certain limits, the administrative cost of making grants also qualifies. Generally, a private foundation must meet or exceed an annual payout requirement of five percent of the average market value of its net investment assets to avoid paying taxes.
If you're a nonprofit looking for funding, the payout requirement can help you. By knowing how much a private foundation holds in assets, you can roughly estimate how much it should pay in grants each year to meet its payout requirement. You can find that information quickly through Candid's powerful database, Foundation Directory.
Foundation Directory has comprehensive information on more than 150,000 private foundations, including foundation assets. Learn more about using Foundation Directory with our guide or video Introduction to Foundation Directory.
Use Foundation Directory for free at all Candid partner locations or subscribe to use Foundation Directory anywhere. Eligible nonprofits with revenue or expenses under $1M can also gain a free year of access to Foundation Directory Professional through our Go for Gold promotion.
You can also look at a private foundation's Form 990-PF to learn about its assets and grants paid. To learn more about Form 990-PF and where to access them, see our article on this topic: Where can I find an organization's Form 990 or 990-PF?
Foundation Payout Depends on How You Average
Nonprofit Quarterly
Have you ever wondered how foundations determine how much they can and should spend in a particular year in grants, loans, and administrative costs?
Several articles that define qualifying distributions and how they are treated for tax purposes.
Taxes on Failure to Distribute Income Private Foundations
Internal Revenue Service
Brief statement on excise taxes charged to private foundations that do not meet their annual payout requirements.
Understanding and Benchmarking Foundation Payout
Foundation Center
Report explains the concept of payout and examines payout practices and spending patterns of more than 1,000 larger U.S. independent foundations. During the period 2007-2009, 46% of endowed foundations reported payout rates in the range of 5-5.9% on average.
What is the 5% payout rule?
National Center Family Philanthropy
A useful FAQ about the 5% payout rule with a chart showing how foundations determine the minimum requirements.