On February 26, 2014, Rep. Dave Camp (R-MI), the Chairman of the Ways and Means Committee, released a draft proposal for comprehensive tax reform. The almost 1,000 page document contains significant changes that will affect individuals, for-profit corporations, and tax-exempt entities. Camp’s proposals will likely be debated throughout the year, but it is imperative that nonprofits stay alert to the possible ramifications of the bill’s lengthy provisions regarding charitable giving, tax exemption, and tax obligations. The discussion draft imposes the following changes:
- AGI Percentage Limitations – Adjusted gross income (AGI) limits on charitable giving will be altered to 40% for contributions to public charities and 25% to private foundations. This lowers the percentage limit for cash contributions, but simplifies the rules by no longer making the distinction of whether the contribution is cash or capital gain property.
- Two-percent Floor for Charitable Giving – A two-percent floor will be imposed for charitable donations to qualify for a deduction. This means that taxpayers may only deduct the amount of their charitable giving that exceeds two percent of their AGI. A 2011 study by the Congressional Budget Office determined that this type of two-percent floor would likely cut charitable giving by approximately $3 billion.
- Excise Tax on Excessive Executive Compensation – Any compensation in excess of $1 million paid to any of the five highest compensated employees of any tax-exempt organization will incur a 25% excise tax. The compensation cap includes both salary and benefits. The rationale behind this provision is to ensure resource accountability of an organization receiving tax exemption by the Federal government.
- Unrelated Business Income Tax – Currently under the law, tax-exempt organizations may calculate unrelated business income tax (UBIT) based on the gross income of all business activities, minus the deductions connected with carrying on those activities. Losses generated by one activity can be used to offset the gains from another. However, under the Camp legislation, organizations will have to calculate UBIT separately for each business activity. This means that the loss from one unrelated business activity will no longer be used to offset the income from another unrelated trade or business activity. Furthermore, any sale or licensing by a tax-exempt organization of its name or logo (including any related trademark or copyright) will be treated as an unrelated trade or business.
- Expansion of Excess Benefit Transaction Rules – Excess benefit transaction rules will be expanded to apply to both 501(c)(5) and (c)(6) organizations (e.g., unions and trade/professional associations, respectively), and a 10% tax will be imposed on an organization whenever the excess-benefit excise tax is imposed on a disqualified person of that organization. Furthermore, the safe-harbor rebuttable presumption of reasonableness will be eliminated.
- Expansion of Self-dealing and Simplification of Private Foundation Excise Tax – The draft legislation imposes a new excise tax of 2.5% on private foundations for each act of self-dealing discovered within the organization and eliminates the professional advice safe harbor for foundation managers. Additionally, excises taxes on private foundation investment income will be changed to a flat 1%.
- Payout Requirement for Donor Advised Funds – Donor advised funds will be required to distribute all contributions within 5 years of receipt or otherwise face a 20% excise tax on the amount not distributed.
- Private Operating Foundations Subject to Distribution Requirements – Private operating foundations will face the same minimum distribution rules currently imposed on private non-operating foundations.
- Type II and Type III Supporting Organizations – Type II and III supporting organizations will be eliminated. Thus, any current Type II or III supporting organization will have to qualify as a Type I supporting organization, another classification of public charity, or a private foundation by 2016.
- Social Welfare Organization Changes – Section 501(c)(4) organizations will need to notify the IRS within 60 days of formation and may seek declaratory judgments in the same manner as 501(c)(3) organizations. Furthermore, social welfare organizations will be required to list on Schedule B of Form 900 each donor contributing $5,000 or more, who is either an officer, director, or one of the organization’s five highest compensated employees.
- Repeal of Tax–Exempt Status for Professional Sports Leagues – While amateur sports leagues may still become tax-exempt under 501(c)(6), professional sports leagues will no longer be permitted to seek exemption.
- Electronic Filing of Form 990-series – Most nonprofit organizations will have to file their IRS Form 990 information returns electronically.
Although it is unclear which, if any, of these provisions will be adopted into law, nonprofit organizations should continue to monitor the debate and contemplate how these proposed changes could affect them.
For additional information:
Committee on Ways and Means
Independent Sector: Tax Reform
Nonprofit Quarterly: Draft Tax Reform Act of 2014 Proposes Profound Impact on Tax-Exempt Organizations