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Distributable Amount
Definition
Under IRS §4942, the distributable amount for a private foundation is calculated as 5% of the average fair market value of the foundation's assets not used directly for charitable activities, minus certain deductions including the excise tax under §4940. The calculation uses a multi-year averaging period for asset valuation to smooth year-to-year market fluctuations. The distributable amount establishes the minimum distribution requirement — foundations must make qualifying distributions at least equal to this amount each year or face excise taxes on the shortfall.
In the Context of Endowment Management
The distributable amount calculation interacts closely with spending policy: a foundation using a spending rate below 5% may have to distribute more than its policy calls for. Conversely, a foundation distributing above its distributable amount can carry forward the excess to satisfy future years' requirements, creating compliance flexibility. Investment committees should understand how market value changes affect the distributable amount calculation across market cycles.