Chances of a massive tax reform proposal becoming law are slim, but several provisions should be of interest to tax-exempt organizations.
The U.S. House of Representatives Ways and Means Committee has released a massive reform plan to dramatically overhaul the nation’s tax code. Several provisions may interest tax-exempt organizations, including some regarding unrelated business income (UBI). The proposed changes also would significantly impact the charitable deductions that donors currently receive.
Chances of the package becoming law as-is in 2014 are virtually nonexistent, but it does provide a starting point for more modest reforms that may find their way into passable legislation.
“CLA considers passage of this tax reform proposal to be extremely remote,” says David Trimner, a principal in CLA’s nonprofit tax group. “The president and both houses of Congress do not seem to be making this a high priority. Nevertheless, certain features may be transferred to other pieces of legislation, so we advise all tax-exempt organizations — particularly charities and those with unrelated business income — to make themselves aware of the relevant elements of the proposal.”
Nonprofit organizations
- Imposes a 25 percent excise tax on certain executive compensation of tax-exempt organizations greater than $1 million
- Eliminates the rebuttable presumption of reasonableness for compensation
- Doubles the late filing penalty for nonprofit information returns
- Imposes 1 percent excise tax on the net investment income of private colleges and universities with endowments greater than $100,000 per full-time student
- Eliminates exemption for Type II and Type III supporting organizations
- Requires that donor-advised funds be distributed within five years
Donors
- Repeals the “Pease Limitation” for high-income earners as an integral part of other reform provisions
- Limits deductible charitable contributions to those exceeding 2 percent of adjusted gross income
- Reduces the 50 percent and 30 percent ceilings on charitable deductions to 40 percent and 25 percent, respectively
- Limits the deduction for contributions of appreciated property (other than public securities, inventory, conservation contributions, scientific property, and mission-related tangible personal property) to the donor’s basis
Unrelated business income
- Includes royalty payments for the licensing of a nonprofit’s name or logo as UBI
- Prevents qualified sponsorships from acknowledging the sponsors’ products
- Prevents qualified sponsorship payments greater than $25,000 from receiving greater benefits than the majority of other sponsors
- Includes research income as UBI unless the results are made freely available to the public
- Requires that advertising expenses be amortized over 10 years
- Requires the separate calculation of UBI from each trade or business; losses from one may not offset gains from another
- Raises the specific deduction from $1,000 to $10,000
- Reduces the top tax rate from 35 percent to 25 percent by 2019
- Allows net operating losses to offset only 90 percent of taxable income
- Repeals the alternative minimum tax
Trimner says that in the current political climate, it may be years before any of these reforms become reality, while others seem dead on arrival. Either way, there is reason to believe that significant changes may be somewhere down the road.