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Net Investment Income
Definition
Net investment income (NII) is calculated as gross investment income (interest, dividends, rents, royalties, and net capital gains from the sale of assets) minus the ordinary and necessary expenses paid or incurred for the production or collection of that income. For private foundations, NII is the tax base for the §4940 excise tax. The calculation of NII — particularly the allocation of expenses between investment and charitable purposes — is a significant compliance consideration for foundations with complex investment portfolios.
In the Context of Endowment Management
Foundations with large, actively managed portfolios face material §4940 excise tax exposure based on their NII. The structure of investment vehicles (e.g., blocker corporations for UBTI-sensitive investments) and the allocation of investment management expenses directly affect NII and therefore the excise tax liability.