The Senate Tax Bill being considered simultaneously with the House Tax Bill in the Republicans’ effort to get something to President Trump by the end of the year, would not modify the Johnson Amendment to allow churches to engage in political activity, but would impose new unrelated business income taxes, deny across-the-board deductions for expenses in generating the unrelated business income, and would impose a tax on organizations involved in excess benefit transactions.
Like the House Bill, the Senate Bill would double the standard deduction for individual taxpayers, which the National Council on Nonprofits estimates would cause individuals without a specific tax incentive to give $13 billion less to charities each year. It would double the limit for imposition of the federal estate tax to about $22 million per couple, but would not phase the tax out entirely as in the House Bill.
The new provisions would impose unrelated business income tax on royalties for use of name and logos, which would hit hard against colleges and universities. It would also change the rule that now allows charities with unrelated business income activities to deduct all expenses in producing that income so that activities with significant losses can shield income from more profitable ones. The Senate proposal would require each type of business activity to be treated individually so that any profitable activity would be taxed.
The other new provision would impose an excess benefit tax directly on the 501(c)(3) or (c)(4) organization involved in an excess benefit transaction, unless the transaction was not willful and was due to reasonable cause. It would reduce the ability to rely on a legal opinion as showing reasonable cause. Present law imposes a tax on the recipient of the excess benefit and on managers who knowingly approve the excess benefit transaction. The new rule would impose a tax of 10% of the excess benefit on the organization as well.
The Bill also expands the definition of “disqualified persons” to include athletic coaches at educational institutions (many of whom would apparently be subject to excise taxes on compensation in excess of $1 million in both the House and Senate bills), and certain financial advisers to donor advised funds. It would also extend the excess benefit rules to 501(c)(5) labor unions and (c)(6) trade associations.
The Senate Bill would repeal the 501(c)(6) tax-exempt status of professional sports leagues. The National Football League was heavily criticized for having tax-exempt status and reportedly voluntarily gave up the exemption several years ago.
The Senate Bill does not include provisions comparable to the House provisions for exclusion of research income from UBIT, requirements for private operating foundation status for art museums, the Newman’s Own provision to allow a private foundation to own 100% of certain unrelated businesses, and additional reporting requirements for donor advised fund sponsoring organizations. (See Nonprofit Issues® story.) The Senate Bill would not kill private activity bonds that provide charities the opportunity to borrow at tax-exempt interest rates. It would not change the investment interest excise tax provision for private foundations or the mileage reimbursement provision for charity volunteers.
The Bill parallels the House bill in imposing a 1.4% excise tax on large college and university endowments, an excise tax on executive compensation of more than $1 million, denial of deduction for payments in exchange for seating rights at college and university sporting events, and increasing the allowable deduction for cash contributions to 60% of adjusted gross income each year.
If each house of Congress is able to pass its own bill, the differences will have to be worked out in a Conference Committee.
YOU NEED TO KNOW
There is still a long way to go before any of these provisions are enacted. Charities concerned with specific provisions of the bill, or the proposal to increase the national debt by $1.5 trillion to provide tax cuts to high income earners and corporations over the next 10 years, should make their views known to their members of Congress.