House Ways and Means Committee Chairman Dave Camp (R-MI) released draft tax reform legislation on February 26. The proposal lowers the top individual and corporate tax rates and reduces deductions. The plan also includes some significant changes for tax-exempt organizations and charitable contributions. Some of the more notable provisions are listed below. The committee also released a summary of the proposal, and the staff of the Joint Committee on Taxation has released a technical explanation of the provisions.
Charitable Contribution Deduction:
- Increases the standard deduction to $22,000 for joint filers and $11,000 for individual filers. There would also be a phase out of the standard deduction, or amount of itemized deductions, for higher income taxpayers. According to projections, this will result in only five percent of taxpayers choosing to itemize deductions.
- Charitable contribution deductions are subject to a 2 percent floor, so they can only be deducted to the extent they exceed 2 percent of the taxpayer’s adjusted gross income.
- Taxpayers can deduct contributions made after the end of the tax year, but before the due date of the return.
- Limitation on deductions for charitable contributions to public charities is 40 % of adjusted gross income (rather than the current limitations of 30% or 50% depending on the type of contribution).
- Limitation on deductions for charitable contributions to private foundations is 25% of adjusted gross income (rather than the current limitations of 20% or 30% depending on the type of contribution).
- Limits the deduction for the contribution of some appreciated real property to the donor’s basis.
- Deductions for conservation easements on golf courses are prohibited.
- Repeals the rule that allows for a charitable deduction of 80 percent of the amount paid to colleges and universities for the right to purchase tickets for athletic events.
Unrelated Business Income Tax (UBIT):
- Clarifies that the UBIT provisions apply to all organizations that are exempt under section 501(a) even if they are exempt, or exclude income, based on other sections of the code. This would affect public pension plans and other organizations that are exempt under both section 115 and section 501(a).
- Income from licensing the organization’s name and logo is subject to UBIT.
- Unrelated business taxable income must be computed separately for each trade or business, so losses from one business cannot offset income from another unrelated business.
- Income from research performed by an organization is only excluded from UBIT if the results of the research are freely available to the public.
- Increases the specific deduction from gross income subject to UBIT from $1000 to $10,000.
- Limits the definition of qualified sponsorship payments, so more payments would be taxable as advertising income.
- Imposes a manager level penalty for any substantial understatement of income tax that is attributable to UBIT.
Executive Compensation and Intermediate Sanctions
- Imposes a 25% excise tax on an organization for compensation in excess of $1 million to any of its five highest paid employees.
- Eliminates the rebuttable presumption of reasonableness for transactions with disqualified persons and establishes a minimum standard of due diligence.
- Imposes an entity-level tax on organizations that engage in excess-benefit transactions.
- Expands the definition of disqualified person under the intermediate sanction provisions to include athletic coaches and investment advisors.
- Applies the intermediate sanction provisions to 501(c)(5) and 501(c)(6) organizations.
Private Foundations, Donor Advised Funds, and Supporting Organizations:
- Imposes an entity-level tax on foundations that engage in self-dealing.
- Requires donor advised funds to distribute contributions within five years of receipt. Failure to make a distribution will result in an annual tax of 20 percent of the undistributed funds.
- Reduces the excise tax rate on net investment income for foundations to 1 percent.
- Requires private operating foundations to follow the distribution rules of private foundations.
- Repeals provisions for Type II and Type III supporting organizations, so these organization would be treated as private foundations.
- Imposes a one percent excise tax on net investment income of private colleges and universities that have at least $100,000 of assets per student.
- Repeals tax-exempt status for professional sports leagues, certain small insurance companies exempt under section 501(c)(15), and co-op health insurance issuers exempt under section 501(c)(29).
- Requires 501(c)(4) organizations to notify the IRS within 60 days of formation.
- Allows for 501(c)(4) organizations to apply for declaratory judgment relief.
- Requires 501(c)(4) organizations to report on Form 990 donations from donors who contribute more than $5000 and are officers, directors, or one of the highest compensated employees of the organization.
- Requires all tax-exempt organizations to file Form 990 electronically.
- Increases penalties for failure to file returns, failure to make returns available to the public, and other similar penalties.