On June 13, the Senate Finance Committee released a paper describing certain tax reform options under consideration for tax-exempt organizations and charitable giving. The various options discussed “represent a non-exhaustive list of prominent tax reform options suggested by witnesses at the Committee’s 30 hearings on tax reform to date, bipartisan commissions, tax policy experts, and members of Congress.” If enacted, many of the proposals would have significant impacts on tax-exempt organizations. The Senate Finance Committee staff has indicated that, although the proposals listed are under consideration, they are not necessarily supported by a member of the Senate Finance Committee. Committee staffers have expressed an interest in discussing these options with organizations that may be affected by the proposals. The report excludes options that retain current law.
Overarching Goals and Guidelines
The report outlines the following “potential goals that could serve as guidelines for the Committee when reviewing the tax rules for exempt organizations and charitable contributions”:
- Maximize the efficiency and effectiveness of any incentives for charitable giving that are retained or reformed
- Consider whether the availability of tax incentives for charitable giving should be broadened to more taxpayers
- More tightly align tax-exempt status with providing sufficient charitable benefits
- Closely examine the relationship between political activity and tax-exempt status
- Reconsider the extent to which tax-exempt organizations should be allowed to engage in commercial activity
- Improve the accountability and oversight of tax-exempt organizations
Specific concerns related to the tax rules affecting tax-exempt organizations include the following:
- Is the charitable deduction, which is an itemized deduction, fair to all taxpayers, given that the amount of the charitable deduction is proportional to a taxpayer’s income tax rate and not all taxpayers pay the same rate of tax due to the progressive tax rate structure?
- Could alternative tax policies, such as an above-the-line deduction coupled with a floor, a refundable credit, or a government matching grant program, achieve the same overall amount of charitable giving at a lower cost to the federal government?
- How much political activity should tax-exempt organizations be allowed to conduct, and what should organizations be required to disclose to their donors?
- Do tax-exempt organizations provide a sufficient public benefit, particularly to the poor and underserved?
- Do some tax-exempt organizations engage in unfair competition with for-profit businesses, which also erodes the corporate tax base and dilutes managers’ focus on the tax-exempt purpose of the organization?
- Should more be done to prevent waste, fraud, and abuse of tax-exempt status, particularly with respect to excessive compensation and high fund-raising costs relative to amounts raised
Major Reform Proposals Being Considered by the Senate Finance Committee
- Repeal the charitable contribution deduction
- Fundamentally reform the charitable contribution deduction by converting it to a refundable or nonrefundable credit, a government matching grant, imposing a cap on the amount or value of the charitable deduction, imposing a maximum dollar cap on itemized deductions including the charitable deduction, allowing non-itemizers to claim the deduction, and limiting the deduction to “traditional” charities, such as churches and homeless shelters, that support the needy.
- Attempt to increase the effect of charitable incentives on charitable giving by only allowing deductions for contributions in excess of a certain percentage of taxpayer income
- Incrementally reform the charitable contribution deduction by simplifying how much taxpayers may deduct as a share of their income, streamlining statutory language, removing the charitable deduction from the overall limitation on itemized deductions, and allowing taxpayers to deduct charitable contributions for the previous tax year until April 15 of the following year
- Limit deductions for noncash contributions to the lesser of the donor’s basis or fair market value, require taxpayers to recognize capital gains on transfers to charity, disallow contributions of property that are not of direct benefit to charities, limit the deductions for clothing and household items to $500, modify the rules regarding contributions of fractional interests in tangible personal property, including art, and allow enhanced deductions for inventory only in response to requests from a charity
- Expand deductions for noncash contributions to allow taxpayers to not recognize gain on a sale of appreciated property if all proceeds are donated to charity within 60 days, make permanent enhanced deductions for the donation of food inventory by all business entities, and increase the standard mileage rate for individual automobile use by volunteers
- Disallow deductions made to support specific commercial activities, including contributions that are a prerequisite to purchasing tickets to sporting events, contributions to support collegiate sports teams, and contributions to organizations engaged in large amounts of commercial activity
- Modify the deduction for contributions of conservation easements by repealing the deduction, making permanent the expanded deduction, replacing the deduction with a refundable credit with a cap, eliminating the deduction for certain types of property, and strengthening the qualification requirements
- Expand or make permanent deductions for tax-free distributions from individual retirement accounts for charitable purposes
- Reform reporting and valuation rules by requiring charities to report gifts above a certain amount (say, $600, to improve compliance), increasing the threshold at which taxpayers are required to obtain a qualified appraisal to $10,000, and increasing reporting requirements for the contribution of inventory property
Reform Proposals Relating to Taxation of Business Activities of Nonprofits
- Tax all commercial activities of tax-exempt organizations
- Revise the requirements for tax-exempt status for organizations engaged in commercial activity to disallow tax-exempt status for organizations engaged in certain business activities, impose requirements on fee-for-service organizations to provide service irrespective of pay or at a reasonable fee, clarify that commercial activities do not jeopardize tax-exempt status even if such activities provide a majority of the entity’s gross income, and reassess the treatment and requirements for hospitals and insurance providers
- Revise the unrelated business income tax (UBIT) rules by classifying certain activities as unrelated to any charitable mission, expanding exemptions from UBIT, exempting charities that exclusively serve the poor from UBIT if income is used to fund the primary purpose, and modifying the UBIT treatment of income from debt-financed activities
- Tighten the rules related to the conversion from tax-exempt to for-profit status by imposing a termination tax on the conversion of assets
- Eliminate the tax-exempt status of professional sports leagues under the definition of “business leagues”
Political Activity and Lobbying of Tax-Exempt Organizations
- Limit political election activity of 501(c)(4), (5), and (6) organizations to a percentage of expenditures (say, 10%), require disclosure of the amount and percentage of expenditures directed at influencing elections, and require organizations supporting political activity to disclose donors
- Change the categories of tax-exempt organizations that may engage in political activities by creating a new category for organizations engaged primarily in political activities, eliminating 501(c)(4) organizations, but allowing them to reapply for exemption under another category, requiring organizations involved in any political campaigning to be a 527 organization, and denying exemption to 501(c)(5) unions if dues are used for political campaign activities
- Impose an excise tax on organizations that fail to report contributions or expenditures to the Federal Election Commission (FEC), require 527 organizations to register with the FEC, and deny expense deductions for election-related activity expenditures by businesses that fail to report such expenditures to the FEC
- Reform reporting and disclosure rules by requiring organizations to notify their members of the portion of their dues used for political or lobbying activities, require any tax-exempt organization supporting political activity to disclose donors, increasing reporting thresholds for 527 organizations, and requiring 501(c)(4), (5), and (6) organizations to apply for tax-exempt status and disclose all donors
- Clarify that payments to 501(c)(4) organizations are excluded from the gift tax
- Expand the prohibition on 501(c)(4) organizations engaging in lobbying from receiving any federal funds, to include contracts
Broad Tax-Exempt Issues
- Reform the taxation of private foundations by replacing the two rates of net investment income excise tax with a single rate (say, 1.40%), or relax the rule prohibiting private foundations from owning more than 20% of a for-profit corporation in certain situations
- Reform the taxation of endowments by requiring organizations with endowments to spend or distribute certain minimum amounts each year (amount equal to at least their ten-year average compounded rate of return on their endowment minus the inflation rate minus 1 percentage point, or, alternatively, an amount equal to 5% of the endowment’s value each year)
- Modify the rules to ensure that donor-advised funds and supporting organizations are directing resources for charitable purposes in a timely fashion by imposing a minimum payout requirement or requiring that all assets be distributed within a specified time frame
- Limit executive compensation, replace the rebuttable presumption standard under section 4858 with a minimum due diligence requirement, and require disclosure of the compensation study
- Reform reporting requirements by requiring organizations to make public their Forms 990-T, requiring electronic filing of all Forms 990, allowing charities with up to $1 million in gross receipts to file a simpler form than Form 990, and requiring organizations intending to claim church status to alert the Internal Revenue Service
- Develop enforcement methods other than revocation of tax-exempt status for noncompliance
Make Your Views Known!
Tax-exempt organizations, members of management, boards of directors, donors, and grant-making organizations should consider these items and make their voices heard by the Senate Finance Committee and staffers.