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 Foundation Center's powerful database, Foundation Directory Online. FDO has comprehensive information for more than 100,000 private foundations, including foundation assets. You can subscribe to FDO or use it for free at Foundation Center offices in New York, Atlanta, San Francisco, Cleveland and Washington, DC. Or find the closest Funding Information Network partner location where you can use FDO for free.
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 articles on this topic.
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