Nonprofits and Tax Reform: 2017 House GOP Plan

House Republicans released their new tax reform bill (the Tax Cuts and Jobs Act) last Thursday, framing it as a “middle-class tax cut” while detractors call it a “tax windfall for the rich” and a “Trojan horse” for the middle-class. According to the nonpartisan Tax Policy Center:

  • The tax cuts will raise deficits by about $1.5 trillion over the next decade, which will eventually need to be paid off by increases in taxes or reductions in spending.
  • The bill showers benefits on the wealthiest taxpayers, the wrong approach for policy and inconsistent with public opinion.
  • Many low- and middle- income households will not receive much, if any, benefit from the bill, and some will face higher taxes.

Former Labor Secretary Robert Reich elaborates:

[T]he top 1 percent will get a gigantic tax cut. The Tax Policy Center estimates that the current plan will save the bottom 80 percent between $50 and $450 in taxes per year, but that it saves each person in the top 1 percent an average of $129,000 a year. For people at the very top, like Trump himself, the tax cuts are humongous. And the corporations they own will also get a massive tax cut.

Major Tax Reform Provisions of Note

In addition to the impacts noted above, which should concern many nonprofits, everyone should be aware of the following provisions applicable to nonprofits that will impact all of us:

  • Doubling of the standard deduction for individual taxpayers. While this may have some initial appeal to many taxpayers, it will also reduce the number of itemizers from about 1 in 3 taxpayers to about 1 in 20. The effect will be to remove the tax incentive for an estimated $95 billion of annual charitable giving, which could result in depressing annual charitable giving by as much as $13 billion. NonProfit Times.
  • Doubling of the exemption levels on, and eventual repeal (after 6 years) of, the estate tax. The current exemption levels allow couples to transfer almost $11 million without any estate taxes. Upon the increase in the exemption levels, only the wealthiest 0.2 percent of estates would pay any estate tax. Scholars and the Congressional Budget Office have estimated bequest giving would drop anywhere from 6 percent to 37 percent. Nonprofit Quarterly.
  • Allowance of churches to engage in partisan political activity. Currently, the prohibition against political campaign intervention (known as the “Johnson Amendment”) applies to all 501(c)(3) organizations, including churches. The Act would allow sermons, teachings, and other presentations to endorse or oppose political candidates if the preparation and presentation of such content was in the ordinary course of a church’s regular and customary activities in carrying out its exempt purpose and results in the church incurring not more than de minimis incremental expenses. This would be impracticable to enforce and amount to a loosening of the Johnson Amendment, which could turn churches, temples, synagogues, mosques, and other house of worship into political operations. See our posts Don’t Let Congress Convert Charities (including Churches) into Dark Money Political Organizations and Johnson Amendment: National Association of State Charity Officials Weighs In. SEE 11/9/17 UPDATE BELOW.
  • Repeal of authority to issue tax-exempt bonds. The Act would repeal the authority to issue qualified private activity bonds, which generally include all tax-exempt bonds issued for the benefit of 501(c)(3) organizations that are not governmental bonds. See Tax Reform and Tax-Exempt Bonds: Risks Presented by the Tax Cuts and Jobs Act (Foley & Lardner LLP)

UPDATE (11/9/17): After a last-hour, highly unethical addition of a major revision to the bill without further analysis of the tremendous adverse impact it would have on the country, the Act would now provide all 501(c)(3) organizations with the ability to engage in partisan political activity.

The following provisions concern private foundations and donor-advised funds (DAFs):

  • Simplified excise tax on private foundation income. Currently, under IRC Section 4940, private foundations are subject to a 2% excise tax on their net investment incomes, but can reduce this rate to 1% by meeting a minimum level of qualifying distributions (the average of their distributions from the previous five years plus 1% of the net investment income for the tax year). Under the Act, the 4940 excise tax rate on net investment income would have a single rate of 1.4% with no possibility of reduction.
  • New exemption from excess business holding tax. Currently, under IRC Section 4943, private foundations are subject to a 10% excise tax on their excess business holdings. Under the Act, business holdings of a private foundation would be exempt from this tax if: (1) the foundation owns all of the business’ voting stock; (2) the foundation acquired its ownership interests in the business other than by purchase; (3) the business distributes all of its net operating income for the tax year to the foundation within 120 days of the close of that year; (4) the business’ directors, officers, trustees, managers, employees, and contractors are not substantial contributors to the foundation; and (5) a majority of the foundation’s board are not also directors or officers of the business or family members of substantial contributors to the foundation.
  • Additional reporting requirement for donor advised funds. Under the Act, sponsoring organizations of DAFs would be required to disclose the average amount of grants made from DAFs during the tax year (expressed as a percentage of the value of assets held in the funds at the beginning of the tax year), and to indicate whether the organization has a policy with respect to DAFs for frequency and minimum level of distributions (and if it has such a policy, to include it with its annual return).

Exempt organizations may also want to be aware of the following provisions, among several others not covered here:

  • New excise tax on private colleges and universities. Similar to the excise tax on net investment income applicable to privation foundations under IRC 4940 (see above), the Act would impose a 1.4% net investment income excise tax on private colleges and universities that have at least 500 students and assets (other than those used directly in carrying out the institution’s educational purposes) valued at the close of the preceding tax year of at least $100,000 per full-time student.
  • Change in exclusion of research income from UBIT. Currently, under IRC 512(b)(9), in the case of an organization operated primarily to carry on fundamental research (as distinguished from applied research) the results of which are freely available to the general public, all income derived from research (either fundamental or applied) performed for any person and all deductions connected with such income are excluded in calculating unrelated business table income. Under the Act, only income (and related deductions) from fundamental research would be excluded.
  • New excise tax on compensation of more than $1 millionUnder the Act, a tax-exempt organization (including, but not limited to, 501(c)(3), (4), (5), (6), and (7) organizations and 527(e)(1) political organizations) would be subject to a 20% excise tax on compensation in excess of $1 million paid to any of its five highest paid employees for the taxable year.
  • Increase in the deduction limit for cash donations to public charities. Currently, under IRC 170(b), the charitable contribution deduction for cash donations to public charities is capped at 50% of the individual taxpayer’s adjusted gross income (AGI). Under the Act, the cap would be raised to 60%
  • Change in charitable contribution deduction substantiation requirements. Currently, under IRC 170(f)(8)(D), in lieu of a contemporaneous written acknowledgement from the donee organization for charitable contributions of $250 or more, which is required to substantiate such a contribution for deduction purposes, a taxpayer may rely on the donee organization’s filing with the IRS that contains the required information necessary for substantiation. The Act would eliminate such alternative form of substantiation.

Additional Resources

Description Of H.R.1, The “Tax Cuts And Jobs Act” prepared by the Staff on the Joint Committee of Taxation (download – JCX-50-17)

House Tax Reform Bill Summary (Independent Sector)

The Good (?), the Bad, and the God-awful: Nonprofit Bottom Lines on the House Tax Bill (Nonprofit Quarterly)

Giving, Politicking, Endowments, and CEO Pay All Could Be Affected by Tax Measure (Chronicle of Philanthropy)