The Administration’s proposed budget for Fiscal Year 2017 features several proposals that would impact charitable organizations and their donors, including proposals to streamline the private foundation excise tax on net investment income, consolidate the deduction limits for charitable contributions and strengthen the requirements for qualified conservation easements.
Proposal to Streamline Private Foundation Excise Tax
Under current law, private foundations are subject to a 1-2% excise tax on their net investment income, including net capital gains. The default tax rate is 2%, but the tax is reduced to 1% for any year in which the foundation’s charitable expenditures exceed the adjusted five-year average of these expenditures. This two-tiered tax structure has been criticized for both its complexity and its consequence of effectively penalizing foundations for significantly increasing their charitable spending in any given year, which, under the current regime, will push up the foundation’s five-year average and thus, the amount of charitable grants it must make in future years in order to qualify for the reduced rate of 1%. The proposal seeks to eliminate this disincentive by replacing the two rates with a single 1.35% tax that would apply to foundations without regard to their prior year charitable expenditures. (Note that taxable foundations, such as certain charitable trusts, also may be subject to the excise tax for years in which their federal income tax due would otherwise be less than what they would owe in income and excise taxes if they were tax-exempt. Under the proposal, the applicable tax rate would be set at 1.35%, but these rules would otherwise remain unchanged.)
Proposals to Consolidate Charitable Deduction Limits and Extend Carryforward Period
Charitable contributions by individual donors are currently deductible up to a percentage of the donor’s adjusted gross income (“AGI”), determined without regard to net operating loss carrybacks. The percentage limit may be 50%, 30% or 20%, depending, among other things, on the type of asset donated and whether the donee is a public charity or private foundation. If the amount contributed exceeds the percentage limit, the excess deduction is disallowed in the year of contribution but can be carried forward for up to five years.
The proposal would consolidate the deduction limits for individual donors by leaving the 50% limit in place for cash donations to public charities and imposing a 30% limit on all other donations (except for qualified conservation contributions, as discussed below). The proposal also would extend the carryforward period for excess contributions from five years to fifteen years, giving donors more time to utilize any unused deductions. (The proposal would not affect corporate donors, which would remain subject to a 10% deduction limit.)
Changes in Requirements for Conservation Easements
Under current law, donors may deduct the fair market value of “qualified conservation contributions,” including easements governing the use of real property that are granted to qualified charitable organizations exclusively for conservation purposes (such as the preservation of certain historic structures). A number of requirements must be satisfied in order for a conservation easement contribution to be deductible, but qualified contributions are eligible for a 50% AGI deduction limit (100% for certain farmers and ranchers) and a fifteen year carryforward period for the portion of any contribution that exceeds the deduction limit.
Conservation easements can be prone to abuses, which has resulted in these types of contributions being the subject of controversy, Congressional scrutiny, and IRS enforcement actions. Among the conservation easement issues that have attracted concern and attention are potentially inflated valuations and the granting of easements that do not serve a legitimate conservation purpose or that otherwise lack substance. The Administration has proposed a number of recommendations to target these and other potential areas of abuse, including:
- issuing regulations to strengthen the requirements for qualifying organizations based on best practices (for example, disallowing donations between related parties and requiring that qualifying organizations have sufficient assets and expertise to enforce the easements and policies in place to review and approve the easements);
- modifying the definition of eligible “conservation purposes” to require that all contributed easements further a delineated and approved government conservation policy and yield a “significant public benefit;”
- imposing additional substantiation and certification requirements for donors and donee organizations; and
- requiring further reporting and public disclosures for donee organizations.
The Administration also would pilot a non-refundable conservation credit program that could eventually replace the deduction for conservation easements.
Other proposals put forward by the Administration include:
- Mandatory e-filing for all tax-exempt organizations required to file Form 990 series returns and Form 8872 returns.
- Increased standard mileage rates for volunteers claiming a deduction for charitable use of a car.
- Repeal of the $150 million non-hospital bond limitation on qualified Section 501(c)(3) bonds.
It appears unlikely that the proposal will be enacted into law, but the provisions may spur additional legislation, and confirm that the issues covered in the proposal continue to be high up on Washington’s reform list.