Encompassed in sweeping tax reform changes proposed by the Committee on Ways and Means and the Senate Committee on Finance are many provisions that, if passed, would significantly impact nonprofits and other tax-exempt organizations.
As of mid-May 2014, the proposed tax code extenders included in the Senate Committee on Finance's EXPIRE Act, Expiring Provisions Improvement Reform and Efficiency Act ( "EXPIRE"), is in limbo, having failed to garner sufficient support in the Senate. Proposed tax reform legislation set forth in the Committee on Ways and Means Tax Reform Act of 2014 ("Camp Act") is currently under review.
Both of these acts include numerous provisions that could have a significant impact on tax-exempt organizations and charitable nonprofit organizations, should some version of the legislation pass and a brief summary of the provisions with broader applicability follows. We've included provisions affecting individual charitable contributions as these changes will certainly impact nonprofit marketing materials and fundraising efforts, should they be adopted.
Tax Reform Act of 2014
The Camp Act projects that the proposed reforms will raise over $1 trillion in revenue over a ten-year period, of which approximately 1% would be generated by tax-exempt sector reforms. The Camp Act's objective to "fix America's broken tax code" includes provisions to increase charitable giving, modify unrelated business income tax ("UBIT") rules to minimize perceived abuses and to simplify the excise tax on net investment income.
The Camp Act permits individual taxpayers to deduct charitable contributions made after the close of the tax year until April 15, and individual charitable contributions are deductible to the extent they exceed 2% of adjusted gross income. Multiple individual percentage limitations for cash and non-cash contributions are eliminated, and replaced with single limits of 40% for contributions to public charities and 25% to private foundations. Generally, contributions of appreciated property would be limited to adjusted basis (rather than fair market value) except for publicly traded stock, qualified conservation contributions and contributions of inventory. There would be no charitable contribution deduction permitted for contributions of land to be used for golf courses or amounts paid for the right to purchase tickets for athletic events.
The Camp Act imposes a 25% excise tax on organizations compensating covered persons in excess of $1 million. The provision is intended to be consistent with tax-deductible compensation limitations on publicly traded corporations, which generally limits compensation deductions to $1 million for CEOs and other highly paid officers.
Unrelated Business Income Tax (UBIT)
Income generating activities that are not substantially related to an organization's tax-exempt purpose are subject to UBIT. Under the current statutes, income from one activity can be offset by losses from another activity. The Camp Act would eliminate the offset resulting in payment of UBIT. On the other hand, the UBIT specific deduction of $1,000 would increase to $10,000.
Certain income-generating activities are specifically excluded from UBIT, such as interest, dividends, capital gains, royalties and rent. The Camp Act designates royalties as unrelated business income to the extent the royalties are generated from name and logo licensing. This is to abolish the current trend of nonprofit organizations that engage in licensing agreements with for-profit businesses to avoid directly engaging in an active trade or business themselves.
Qualified Sponsorship Payments
Essentially, this provision would eliminate the promotion of any individual sponsor of a fundraising event. As long as all event sponsors are promoted equally and collectively, UBIT would not be triggered. Any event generating $25,000 or more from sponsors would be unable to promote exclusive sponsorship and avoid UBIT.
Under current statutes, non-operating private foundations are subject to an excise tax on net investment income of 1% or 2%, as applicable. The net investment income of private university endowments is not subject to the excise tax, as private universities are exempt as public charities. The Camp Act proposes an excise tax similar to the private foundation excise tax on private colleges and universities having average endowment assets of $100,000 per full-time student and full-time equivalent students.
Additionally, the private foundation excise tax would be simplified and reduced to a flat 1% on net investment income, and the excise tax on net investment income would be extended to exempt operating foundations which are not currently subject to the excise tax.
Donor advised funds are public charities that establish "accounts" on behalf of donors and accept recommendations with respect to making distributions from the "accounts". There is currently no requirement that the contributions to the "accounts" be paid out in any specified time-frame.
The Camp Act imposes a five-year distribution requirement and imposes a penalty of 20% for failure to distribute. Similarly, a provision will require private operating foundations to meet minimum distribution requirements that are currently only applicable to non-operating private foundations.
It Would Also:
- Eliminate 501(c)(6)tax exemptions for professional sports leagues and associations.
- Repeal Type II and III supporting organizations - existing Type II and III organizations would be treated as private foundations.
- Double the penalties assessed for late-filed or incomplete Form 990.
- Make electronic filing of Form 990 mandatory. Currently, only tax-exempt organizations filing 250 or more tax forms are required to file electronically.
All of the provisions of EXPIRE are designed to expire so that meaningful incentives can be incorporated in future tax reform. Of the 61 tax extender provisions, the following would impact nonprofit charitable organizations.
Gifts of Appreciated Real Property for Conservation Purposes
EXPIRE extends increased contribution limits and the carry-forward period for contributions of appreciated real property for conservation purposes. EXPIRE also extends the temporary provision for deductible gifts of appreciated real property for conservation purposes, to the extent they do not exceed 50% of the contribution base. If the temporary provision is not extended, the limitation decreases to 30% of the contribution base.
Tax-Free Distributions from Individual Retirement Accounts
Under the present law, tax-free distributions from individual retirement accounts for charitable purposes do not apply to distributions made after December 31, 2013. EXPIRE extends tax-free distributions for two additional years through 2015.
Charitable Contributions of Food Inventory
EXPIRE would extend the enhanced deduction for contributions of food inventory for two additional years through 2015. Without the extension, only C corporations may claim an enhanced deduction for contributions of food inventory.
Payments from controlled subsidiaries subject to UBIT
Payment of rent, royalty, annuity and interest income to a tax-exempt organization from a controlled taxable or tax-exempt subsidiary is treated as UBIT. EXPIRE would extend the special rule to exclude these payments from UBIT for two additional years through 2015.
We will continue to monitor these tax reform proposals and will feature any enacted legislation impacting nonprofits and tax-exempt organizations in a future newsletter.
For questions about the content of this article, please contact Sarah Avery at SAvery@FriedmanLLP.com or contact your engagement partner.