Posted: November 13, 2017
Federal Tax Reform Update
U.S. House Tax Reform Plan Amended to Politicize All 501(c)(3) Nonprofits
Late last week, the U.S. House Ways and Means Committee approved an amendment to the Tax Cuts and Jobs Act (H.R.1) that would severely weaken the Johnson Amendment, which protects the public’s trust in nonprofits by keeping partisan politics out of 501(c)(3) organizations. The provision would give all 501(c)(3) nonprofits a partial (and vaguely worded) exemption from the prohibition on partisan political intervention. The provision would allow nonprofits to endorse candidate for office “as long as the speech is in the ordinary course of the organization’s business and the organization’s expenses related to such speech are de minimis.” This major change to Section 501(c)(3) of the Internal Revenue Code would be effective from 2019 through 2023.
NAO strongly opposes this provision, which would divert money from nonprofits’ missions into partisan politics and would damage the public’s trust in nonprofits by transforming 501(c)(3) organizations into fundraising shells for politicians.
The Ways and Means Committee approved the Tax Cuts and Jobs Act minutes after approving Chairman Brady’s amendment, and the full House is expected to vote on the bill this week. Unfortunately, it is expected that no amendments will be allowed to the bill on the House floor. Take steps now to protect the Johnson Amendment!
House Tax Plan Would Reduce Charitable Donations and Nonprofit Financing Options
In addition to politicizing 501(c)(3) organizations, the Tax Cuts and Jobs Act would also make a variety of other changes affecting charitable nonprofits. Most notably:
- By nearly doubling the standard deduction, the House tax plan would reduce charitable giving by about $13 billion per year, since only 6% of Americans would itemize their taxes – down from about 30% who currently use itemized deductions. Congress could preserve – and even expand – charitable giving through tax reform by adding a universal, non-itemizer deduction for charitable contributions to the tax plan or by passing separate legislation like the Universal Charitable Giving Act (H.R. 3988), introduced by Congressman Mark Walker (R-NC).
- The House tax plan would eliminate all tax-exempt private activity bonds, including qualified 501(c)(3) bonds. A variety of nonprofits, including schools, hospitals, museums, and affordable housing organizations, use these bonds to finance building and renovation projects.
- The House plan would double the exemption from the estate tax (to about $11 million for individuals and about $22 million for couples) for six years and then repeal the estate tax in 2023. This is significant for nonprofits because charitable donations and bequests are exempt from the estate tax. A higher exemption will likely mean that fewer estates will make large bequests to nonprofits (or create new foundations) for tax purposes.
The plan also makes changes to a variety of other tax laws that affect nonprofits, including unrelated business income rules, the volunteer mileage rate, excise taxes on nonprofit higher education endowments, private foundation excise taxes, and donor advised fund disclosures. For more details on the House tax plan, see a comparison of nonprofit provisions in the House and Senate tax reform plans.
U.S. Senate Tax Plan Would Also Change Many Nonprofit Tax Laws
Last week, the U.S. Senate released its own tax reform plan, also known as the Tax Cuts and Jobs Act. Although it differs greatly from the House version, the Senate plan would also make many changes to tax laws affecting nonprofits. Most notably, the Senate version is an improvement over the House plan because it makes no changes to the Johnson Amendment and preserves private activity bonds. Other key changes for nonprofits in the Senate tax reform package include:
- Doubling the standard deduction without adding a universal, non-itemizer deduction for charitable giving. As with the House plan, this would reduce charitable giving by billions of dollars every year.
- Raising the limit of cash donations that individuals can deduct from 50% of adjusted gross income (AGI) to 60% of AGI and eliminating the total limit on itemized deductions. Of course, these changes would only benefit the small percentage of taxpayers who would still itemize their deductions.
- Imposing a 10% excise tax on nonprofits in some instances when a disqualified person (e.g. a board member or nonprofit executive) receives an excess benefit transaction. Under current law, these penalties are only imposed on the disqualified person and/or on board members who approved of the transaction. The changes would penalize the people served by nonprofits by imposing an excise tax on nonprofit organizations rather than just on the individuals who received excess benefits.
- Replacing the “rebuttable presumption of reasonableness” with “due diligence procedures”, which may make it harder for nonprofits to confidently rely on comparability data in setting executive compensation and establishing the appropriate valuation for transactions with board members. The Senate version also would eliminate a law that absolves nonprofit boards of liability for intermediate sanctions if they rely on professional advice and would apply intermediate sanctions rules to investment advisers and athletic coaches.
- Creating a new 1.4% excise tax on net investment income of nonprofit colleges and universities with assets of at least $250,000 per full-time student.
- Imposing a new 20% excise tax on nonprofits that provide compensation of $1 million or more to any of their five highest-paid employees.
- Treating income from licensing a nonprofit’s name or logo as unrelated business income that is subject to unrelated business income tax (UBIT) and treating each business activity of a nonprofit separately for UBIT purposes, which could result in more UBIT liability for some nonprofits because there would be less opportunity to offset income with related expenses. Nonprofits would also pay a lower tax rate on UBIT, since the House plan would lower the maximum corporate income tax rate from 35% to 20%.
- Doubling the exemption from the estate tax (to about $11 million for individuals and about $22 million for couples). This is significant for nonprofits because charitable donations and bequests are exempt from the estate tax. A higher exemption will mean that fewer estates will make large bequests to nonprofits (or create new foundations) for tax purposes.
To help you digest how the changes in the House and Senate bills might affect your nonprofit, NAO, working with the North Carolina Center for Nonprofits, is issuing a chart comparing key nonprofit provisions in the two versions (see chart here). The Senate Finance Committee will begin its action on the bill on November 13, 2017 and the full Senate is expected to vote on it later this month.