Tax Reform Bill Provisions Would Affect Exempt Organizations

Today, the House Ways and Means Committee released the Tax Cuts and Jobs Act to overhaul major aspects of the United States tax system. The bill is widely seen as the beginning of an ongoing negotiation. Chairman Brady indicated that he plans to release a chairman’s mark as soon as tomorrow that incorporates feedback from members, and the bill is scheduled for committee markup on November 6. In addition, the Senate Finance Committee is working on its own tax reform plan.

Click here for a section-by-section summary.

Provisions Affecting the Charitable Contribution Incentive

Several provisions of the act would have an indirect impact on the incentive value of the charitable contribution deduction. The act would:

  • Leave the charitable contribution deduction in place as an itemized deduction. No “universal” or “above-the-line” deduction was included in the act.
  • Expand the standard deduction while many other itemized deductions are repealed or limited (including the deduction for state and local income tax). This is expected to reduce the number of taxpayers taking itemized deductions and, consequently, limit the benefit of the charitable contribution deduction.
  • Reduce the marginal rates for individuals, corporations, and certain pass-through business income generally, weakening the tax incentive to make charitable contributions.
    • However, the top marginal rate for individuals would remain at 39.6%
  • Double the credit against estate, gift, and generation-skipping transfer (GST) tax, and repeal the estate and GST taxes after six years, reducing the tax incentive for charitable giving at death.

The act would also make revisions to the charitable contribution deduction, including:

  • Increasing the percentage-of-income limitation for cash contributions from 50% to 60%, increasing the incentive for certain large cash contributions.
  • Adjusting the amount deductible for use of a passenger automobile for charitable purposes from the current fixed 14 cents per mile, to an amount that reflects the current variable cost of operating an automobile (as is currently used to calculate the medical and moving expense deductions).
  • Denying a deduction for contributions associated with receipt of rights to purchase tickets to college athletic events.
  • Repealing the controversial option in section 170(f)(8)(D) under which the IRS currently may allow donee organizations to report charitable contributions to the IRS instead of sending a contemporaneous acknowledgement to the donor.

Other Provisions Affecting Charity Income

The act would expand tax on the revenue of some tax-exempt organizations, including the following provisions:

  • A 1.4% excise tax on the net investment income of private colleges and universities with over 500 students and assets in excess of $100,000 per student. The current two-tier private foundation excise tax on investment income would be replaced by a simplified flat 1.4% excise tax as well – a higher rate than that proposed in the 2014 House bill.
  • A clarification that the unrelated business income tax (UBIT) applies to “dual-status” organizations, which are also exempt under provisions of the code other than section 501.
  • A narrowing of the UBIT exclusion for research income, limiting its application to income from research that is freely available to the public.

In addition, the act would also repeal the New Markets Tax Credit, which provides funding for community economic development in distressed communities through credit allocations, often to tax-exempt organizations.

Provisions Affecting Charity Employers and Employees

Several provisions of the Act would increase the taxes on the salary and benefits received by charity employees, adding a tax either on the charity or the employee. For example, the Act would:

  • Impose a 20% excise tax on compensation of certain employees paid by tax-exempt employers in excess of $1,000,000 per year.
  • Expand the UBIT to certain fringe benefits (qualified transportation, qualified parking, and on-premises athletic facilities) provided to employees of tax-exempt organizations. The act would disallow a deduction for the same benefits provided by taxable employers.
  • Repeal exclusions from employee income for dependent care assistance programs and adoption assistance programs, and limit the exclusion for employer-provided housing to $50,000 for one residence with a phase-out for highly-compensated employees (currently, those earning over $120,000 per year). These proposals affect for-profit, as well as nonprofit, employees.

Other Provisions Affecting Charities

  • Churches would be permitted to make statements relating to political candidates in the ordinary course of religious services and activities, provided the church incurred only de minimus incremental expenses.
  • A limited exception to the excess business holding rules for private foundations would be created for certain wholly-owned and independently operated businesses where all net operating income promptly is distributed for use in the foundation’s charitable purposes.
  • Donor advised fund sponsoring organizations will be subject to additional reporting requirements.
  • Organizations that operate an art museum as a substantial activity will not qualify as private operating foundations unless the museum is open during normal business hours to the public for at least 1,000 hours per year.