1. Yesterday, the U.S. House of Representatives approved the Tax Cuts and Jobs Act (H.R. 1), its tax reform plan. The House plan includes a number of provisions that would harm nonprofits, most notably: a. It would severely weaken the Johnson Amendment, which protects the public's trust in nonprofits by keeping partisan politics out of 501(c)(3) organizations. Section 5201 of the H.R. 1 would give all 501(c)(3) nonprofits a partial (and vaguely worded) exemption from the prohibition on partisan political intervention. The provision would allow nonprofits to endorse candidate for office "as long as the speech is in the ordinary course of the organization's business and the organization's expenses related to such speech are de minimis." This major change to Section 501(c)(3) of the Internal Revenue Code would be effective from 2019 through 2023. This provision, which would divert money from nonprofits' missions into partisan politics. It would damage the public's trust in nonprofits by transforming 501(c)(3) organizations into Democratic nonprofits and Republican nonprofits, and it would divert billions of dollars in political campaign spending to newly politicized churches and nonprofits. b. By nearly doubling the standard deduction, the House tax plan would reduce charitable giving by between $12 billion and $20 billion per year, since only about 5% of Americans would itemize their taxes - down from about 30% who currently use itemized deductions. c. H.R. 1 would eliminate all tax-exempt private activity bonds, including qualified 501(c)(3) bonds. A variety of nonprofits, including schools, hospitals, museums, and affordable housing organizations, use these bonds to finance building and renovation projects. d. The House plan would double the exemption from the estate tax (to about $11 million for individuals and about $22 million for couples) for six years and then repeal the estate tax after 2024. This is significant for nonprofits because charitable donations and bequests are exempt from the estate tax. A higher exemption will mean that fewer estates will make large bequests to nonprofits (or create new foundations) for tax purposes. New research suggests that the elimination of the estate tax would reduce charitable bequests by $4 billion per year.
2. Universal Charitable Deduction Gains Bipartisan Support in Senate This week, U.S. Senators from both major political parties followed the lead of Representative Mark Walker (R-NC) in pushing for the addition of a universal, non-itemizer deduction for charitable contributions to the tax plan or by passing separate legislation. Last month, Representative Walker introduced the Universal Charitable Giving Act (H.R. 3988), which we strongly support. This week, Senator James Lankford (R-OK) introduced an identical bill (S.2123) in the U.S. Senate, and Senators Debbie Stabenow (D-MI) and Ron Wyden (D-OR) introduced an amendment to the Senate tax reform bill that also would create a universal charitable deduction. The Democratic amendment was voted down along party lines like all other amendments offered in the Senate Finance Committee.
A new report from the nonpartisan Tax Policy Center highlights the need for a universal charitable deduction as part of tax reform. The Tax Policy Center analysis found that the House and Senate tax reform plans would mean that nonprofits would lose between $12 billion and $20 billion in contributions every year. An earlier conservative analysis from Indiana University estimated that the tax bills would reduce giving to the work of charitable nonprofits by $13 billion each year.
3. U.S. Senate Finance Committee Approves Its Tax Reform Plan Last night, the U.S. Senate Finance Committee approved its own tax reform plan, also known as the Tax Cuts and Jobs Act, after a multi-day markup. Although it differs greatly from the House version, the Senate plan would also make many changes to tax laws affecting nonprofits. Most notably, the Senate version would have the same impact on charitable giving as the House plan, but makes no changes to the Johnson Amendment and preserves private activity bonds. Other key changes for nonprofits in the Senate tax reform package include: a• Punishing nonprofits that are the victims of excess benefit transactions by imposing a 10% excise tax on nonprofits in some instances when a disqualified person (e.g. a board member or nonprofit executive) receives an excess benefit transaction. Under current law, these penalties are only imposed on the disqualified person and/or on board members who approved of the transaction. The changes would penalize the people served by nonprofits by imposing an excise tax on nonprofit organizations rather than just on the individuals who received excess benefits. b• Replacing the "rebuttable presumption of reasonableness" with "due diligence procedures", which may make it harder for nonprofits to confidently rely on comparability data in setting executive compensation and establishing the appropriate valuation for transactions with board members. The Senate version also would eliminate a law that absolves nonprofit boards of liability for intermediate sanctions if they rely on professional advice and would apply intermediate sanctions rules to investment advisers and athletic coaches. c• Treating income from licensing a nonprofit's name or logo as unrelated business income that is subject to unrelated business income tax (UBIT) and treating each business activity of a nonprofit separately for UBIT purposes, which could result in more UBIT liability for some nonprofits because there would be less opportunity to offset income with related expenses. Nonprofits would also pay a lower tax rate on UBIT, since the House plan would lower the maximum corporate income tax rate from 35% to 20%. d• Doubling the exemption from the estate tax (to about $11 million for individuals and about $22 million for couples), but not repealing the estate tax. ...