Tax Reform Proposal Impact on Charitable Organizations

There may be some significant changes on the horizon, as can be seen if you review House Ways and Means Chairman Dave Camp’s (R-MI-4) comprehensive tax reform bill. This bill would significantly modify both the corporate and individual tax codes, and includes many provisions that could impact tax-exempt organizations.

The Council on Foundations has policy and legal experts that have been reviewing the numerous ways in which the nonprofit sector could be impacted, both negatively and positively, by this proposed legislation.

Vikki Spruill, President and CEO of the Council on Foundations, released the following statement:

“The Council on Foundations supports the goal of comprehensive tax reform and commends Chairman Camp for his continued efforts to move that process forward. We applaud the Chairman for his proposal to simplify the current private foundation excise tax by introducing a single rate of one percent. Our members have long supported simplifying the complex, tow-tiered private foundation excise tax to a flat rate. We are also pleased to see that the Chairman’s plan would extend the deduction for charitable contributions to April 15th, ensuring that taxpayers have adequate time to make charitable donations and take advantage of the deduction.

“Among the Council’s concerns with the proposal, however, is the impact of the proposed floor on the charitable deduction, which would deny donors a deduction for the full value of their charitable gifts. As Congress considers how to best reform the tax code, the Council urges Members of Congress to ensure that proposed reforms do not impede the philanthropic sector’s efforts to serve the country.”

In the Council’s recent edition of Washington Snapshot, they shared the following information about various provisions in the bill that would be of interest not only to foundations of various types, but also to the nonprofit sector in general:

• 2 percent floor on the charitable deduction – An individual’s charitable contributions could be deducted only to the extent that they exceed 2 percent of an individual’s adjusted gross income. This could significantly reduce the value of the charitable deduction for a number of donors.
• Private foundation excise tax simplification – While the bill simplifies the current two-tiered excise tax to a flat rate of 1 percent, which could be a benefit to a number of private foundations, it also removes the current exclusion for exempt operating foundations, making them subject to the excise tax for the first time.
• Mandatory e-filing of Form 990s for all tax-exempt organizations – The bill requires all tax-exempt organizations required to file Form 990s to file these returns electronically, and for the IRS to make the returns publicly available electronically. There could be significant compliance costs associated with e-filing for small nonprofits and private foundations, and this should be considered before this provision is approved.
• Extension of the charitable deduction to April 15th of the calendar year – This provision would allow taxpayers to deduct charitable gifts made after the close of a tax year but before April 15th. This would give donors more flexibility in planning their charitable contributions and could be a good thing for both donors and nonprofits.
• Five-year payout requirement for donor-advised funds – The proposal would assess a 20 percent excise tax on public charities—including community foundations—that fail to distribute contributions from donor-advised funds within five years. The Council (and your Community Foundation, of course) believes that donor-advised funds are unique giving vehicles that allow an individual to channel their philanthropic giving to projects and programs that they care about in their communities. This proposal may create additional burdens on the organizations that utilize donor-advised funds. The provision appears to end endowed donor-advised funds through a mandatory payout requirement. It also limits eligible distributions to public charities.
• Repeal of Type II and Type III supporting organizations. This proposal has the potential to reduce the flexibility of community foundations and other organizations to establish separate but related entities. Type III supporting organizations are often viewed as alternatives to private foundations, but under the proposal they must be operated, supervised or controlled by a public charity—sacrificing some of their autonomy.
• Changes to the treatment of certain unrelated business income – The proposal extends the Unrelated Business Income Tax (UBIT) and changes the manner in which it is calculated. It applies UBIT to name and logo licensing, applies UPIT to income from fundamental research that is not made available to the public, and heavily regulates when UBIT applies to sponsorship at a recognize event, along with other changes. These could negatively impact innovation among nonprofit organizations as they continue to attempt to generate operating revenue.
• Phase-out of itemized deductions for certain taxpayers – Single taxpayers with adjusted gross incomes above $250,000 and married taxpayers with incomes above $300,000 could experience this phase-out, having an impact on what portion of their charitable contributions can be deducted.
• Excise tax on certain private colleges and universities – The bill would impost a one percent excise tax on the net investment income of many private colleges and universities, similar to the private foundation excise tax. The tax could apply to those private colleges and universities with investment assets that exceed $100,000 per full time student.
• Excise tax on excess executive compensation – The bill includes a 25 percent excise tax on executive compensation in excess of $1 million paid to any of an organization’s five highest paid employees for the tax year.

Responses to these and other provisions have been various and include both lauds and criticisms from all sectors. There are proposed limits on mortgage interest deductions and capital gains, and the repeal of deductions for state and local property taxes. These items, coupled with the 2-percent threshold for the charitable deduction, could make the tax incentive for middle-class citizens to give to charity all but disappear.

We will be considering carefully the impact of this bill on both the Community Foundation of the Lowcountry and the nonprofit sector. Obviously, we are concerned that a reduced tax incentive for middle-class citizens will have an impact on contributions to both the Community Foundation and the sector. And of course the payout requirement for donor-advised funds could be very detrimental to our work. The reduction of flexibility for donors may make this option less attractive. This would be unfortunate for a number of reasons, not the least of which is the positive impact that donor-advised grants have on local nonprofits.

I would simply encourage you to read the bill, listen carefully to all commentary, and consider the impact on not only the country, but also on your family and on the organizations that you support. This bill will create the basis for future discussion about tax code reform, and therefore needs your critical attention.

Ah, the times they are a-changing, and this is one of those not-so-everyday matters that makes EVERY DAY MATTER.