The “Tax Cuts and Jobs Act” (H.R.1) introduced by the Republicans in the House of Representatives contains a series of specific provisions that would affect charitable organizations but has drawn most of its criticism from national charitable organizations for its apparent impact in reducing the economic incentives for charitable giving and for partially repealing the “Johnson Amendment” to permit churches to engage in political activity.
The National Council of Nonprofits, the Independent Sector, and the Council on Foundations have all come out in opposition to the bill. The Council on Foundations says it “fails to enhance” the culture of charitable giving. The Independent Sector says it would “shift resources from charities and our communities to the wealthiest Americans.” The National Council of Nonprofits says the decrease in the number of taxpayers who would itemize their deductions would decrease charitable giving by up to $13 billion annually.
The bill proposes to nearly double the standard deduction for individual taxpayers so that about 95% would no longer need to itemize deductions. It does not include a “universal deduction” advocated by national organizations to give a tax incentive for all taxpayers to make charitable contributions.
It also immediately doubles the exemption from the federal estate tax from about $11 million per couple to about $22 million per couple and repeals the tax altogether after six years. Many experts predict that the loss of estate tax will substantially reduce the bequest giving to charities. The House estimates that the bill will overall increase the national deficit by $1.5 trillion over 10 years, thus causing all taxpayers to fund the borrowing that will give most of the benefits to the wealthiest taxpayers and large corporations.
The bill would essentially repeal the Johnson Amendment prohibiting charities from engaging in political activity in support of or in opposition to candidates for public office. The actual bill available on the House website applies to all 501(c)(3) organizations, although the version released by the committee chair applies only to churches and their integrated auxiliaries that do not have to file for recognition of exemption. A charity would not be deemed to have intervened in a political campaign “solely because of the content of any statement made in the ordinary course of carrying out their exempt purposes and with no more than “de minimis incremental expenses.” The church provision in the chairman's version would apply to "any homily, sermon, teaching or other presentation made during religious services.”
Long requested by some religious leaders, the provision has been opposed by others for injecting religion into politics and for providing not only another opportunity for undisclosed “dark money” in politics, but also money that is tax deductible. (See Commentary: “Keep Charities Out of Politics”) The Joint Committee on Taxation estimates that the church provision would reduce federal tax revenues by $2.1 billion over 10 years.
To pay for some of the lost revenue envisioned by the tax cuts, the bill would impose some additional taxes on the charitable sector.
Tax on Executive Compensation. The bill would impose a 20% excise tax on compensation in excess of $1 million paid to any of its five highest paid employees in any year. (Sec. 3803.) The House Ways and Means Committee staff says (incorrectly) that there is no limit on excessive compensation, apparently forgetting the excess benefits tax for unreasonable compensation, and says the proposal is consistent with the limitation on deductibility of executive compensation of C corporations at $1 million. The business corporate provision, however, allows additional performance based compensation, such as stock options, without any limitation on the deductibility. The Committee says that “given that exemption from Federal income tax constitutes a significant benefit conferred upon tax-exempt organizations, the case for discouraging excess compensation paid out to such organizations’ executives may be even stronger than it is for publicly traded companies.” (Does this mean that college football coaches can't earn more than $1 million a year?) The JCT estimates that the change would increase tax revenues by $3.6 billion over 10 years.
Tax on University Endowments. The bill would impose a 1.4% excise tax on net investment income of private (not public) colleges and universities with at least 500 students and having assets “(other than those assets which are used directly in carrying out the institution’s exempt purpose)” of at least $100,000 per student. (Sec. 5103.) The JCT estimate for this provision is $3 billion from such institutions over 10 years. (The chairman raised cut-off level to $250,000 per student two days after the initial release of the proposal, which would reduce the total estimated revenue.) (See Ready Reference Page: “Congressional Research Service Lists Options to Regulate University Endowments”)
Unrelated Business Income Tax on Research. The bill would provide that research is exempt from unrelated business income tax only if the results of the research are made freely available to the public. (Sec. 5002.) This provision would raise $0.7 billion.
Simplification of Tax on Private Foundations. Present law imposes an excise tax of 2% on the net investment income of private foundations, with an opportunity in some circumstances to reduce the tax to 1% by increasing distributions for charitable purposes. Foundations have long requested simplification of the system. The bill would impose a single excise tax of 1.4% on net investment income in all situations, which the JCT says would increase revenue by less than $50 million. (Sec. 5102.)
Tax on certain fringe benefits. Under current law, tax-exempt entities are situated similarly to taxable entities with regard to providing their employees with transportation fringe benefits and on-premises gyms and other athletic facilities free of tax at both levels. The bill would impose a tax on such benefits from exempt entities by treating the funds used to provide those benefits as unrelated business taxable income. The committee says this would create parity between different types of entities so that one does not have an advantage over the other with regard to recruiting and retaining employees. (Sec. 3308.)
Charitable deduction issues. The bill would make a number of changes with regard to charitable contributions in general. It would increase the percentage limitation on deductibility of cash gifts to charity from 50% of adjusted gross income per year to 60% of AGI, and continue the five year carry-over provision.
It would repeal the provision that permits a charitable deduction of 80% of the amount paid for the right to purchase tickets to college and university athletic events.
It would permit the amount deductible per mile driven in service to a charitable organization to be adjusted for inflation.
It would repeal the provision, seldom used, permitting a donor to dispense with a contemporaneous written acknowledgment of a gift of $250 or more if the organization reported the gift on its annual Form 990 tax return, including the donor’s social security number.
In other provisions, the bill would:
Require art museums to be open to the public at least 1000 hours a year to qualify as a private operating foundation.
Require additional reporting with regard to donor advised funds. Because of concerns that some donor advised funds do not make distributions on a regular basis, the bill would require sponsors of donor advised funds to disclose annually their policies on “inactive” funds and the average amount of grants made from their funds.
The Newman’s Own exception. Present rules for private foundations prohibit a foundation from owning more than 20% of a non-functionally related for-profit business for more than 5 years (or 10 years with an exemption from the IRS). When actor Paul Newman died, he left his stock in his food company to his foundation so that it was the sole owner and received the profits of the food company. The foundation is running up against the 10 year limit and sought a legislative fix. The bill includes a provision (Sec. 5104) excluding from the excess business holding provision a business wholly owned by the foundation that provides all profits to the foundation within 120 days of the close of the taxable year and is managed by a board of independent directors.
Private Activity Bonds. The Bill would eliminate "private activity bonds" by which many charities are able to finance new construction or rehabilitation of facilities with bonds at tax-exempt interest rates. (Sec. 3601.) It would also eliminate the ability to issue "advance refunding bonds" to obtain a lower interest rate. (Sec. 3602.)
YOU NEED TO KNOW
This bill is a long way from passage and may be significantly modified in the House and particularly in the Senate before it is passed, if ever. But it presents an opening bid for consideration. It also reveals, especially in the limitation on executive compensation provision, the tax on fringe benefit provision, the tax on private university endowments, and the elimination of private activity bonds an especially antagonistic view toward the charitable sector.