The Senate Finance Committee has released its latest tax reform options and nonprofits are squarely in the middle of it.
The options are many and varied, and occasionally contradictory. They are broken into four broad groups: charitable deduction, business activities, political activity and lobbying, and “broad tax exempt issues.”
“This compilation is a joint product of the majority and minority staffs of the Finance Committee with input from Committee members’ staffs,” wrote the authors of the report. “The options described…represent a non-exhaustive list of prominent tax reform options suggested by witnesses at the Committee’s 30 hearings on tax reform to date, bipartisan commissions, tax policy experts, and members of Congress.”
Prominent among the options for charitable deduction reform is the now-familiar refrains of capping the deduction at a percentage or a dollar amount. Studies estimate a loss of between $1.7 billion and $5.6 billion if a 28-percent cap was enacted, as suggested by President Barack Obama. Other options in this section include repealing the deduction entirely and only providing tax incentives for contributions in excess of a percentage of income.
“As the Senate Finance Committee advances tax reform legislation, we know many different proposals will be considered and debated, including those in this tax options paper. We raise concern over some of those proposals, including changes to the charitable deduction, that will hinder philanthropic freedom,” said Sandra Swirski, executive director of the Alliance for Charitable Reform in Washington, D.C. in a statement. “The current charitable deduction serves as a catalyst for spurring private giving, including the valuable contribution of dedicated volunteers. The resources generated by private giving support those in need. ”
Another suggestion is repealing the deduction and providing charities with a matching grant in the form of a refundable credit equal to some percentage of the donor’s contribution. One proposal, from Eugene Steuerle, Ph.D., of the Urban Institute during testimony in February, would allow taxpayers to deduct contributions until April 15 of the following year.
“The people who benefit from our services don’t care where the money comes from. All the proposals that reduce giving are bad from our perspective,” said Steve Taylor, senior vice president and counsel for public policy for United Way Worldwide, based in Alexandria, Va. “With that said, we recognize that the Senate Finance Committee is going through a very serious process of examining the proposals out there. I don’t read between the lines that this report indicates a preference of any proposal or limitation.”
Contribution of personal property is also touched upon. One proposal would limit deductions of property to the lesser of the donor’s basis in the property or the fair market value. Another would allow unlimited deductions for the fair market value of all appreciated property, but require capital gains tax be paid, and another would disallow donations of property unless it is of direct benefit to the charity.
The first option regarding taxation of business activities is to tax all commercial activities. Another suggestion entails disallowing tax-exempt status for fee-for-service organizations such as credit unions, nonprofit hospitals and insurance firms, or require reasonable fee, independent governing body and a requirement to provide service irrespective of ability to pay. The Congressional Budget Office in 2009 suggested that income from university athletic programs be taxed as unrelated business income (UBIT).
A suggestion to regulate political activity and lobbying of certain nonprofit organizations seems to piggyback on a rule enacted this week by New York Attorney General Eric Schneiderman. He has required that New York nonprofits disclose their percentage of expenditures on political activity, with the added requirement that those spending more than $10,000 on state and local elections itemize their expenditures and disclose their donors. A number of suggestions mimic this new requirement. One suggestion is to eliminate 501(c)4 organizations entirely but allow them to reapply as a different type of organization, such as a 527.
Suggestions in the fourth category, broad tax-exempt issues, deal with foundations and endowments. One would require organizations with endowments spend an amount equal to their 10-year average compound return minus inflation minus 1 percentage point. Another mandates that organizations with endowments distribute a percentage of the endowment’s value each year.
Some options in this category also recommend streamlining reporting requirements, such as requiring all organizations to electronically file their Forms 990s and relax some reporting requirements for charities with up to $1 million in gross receipts. The final suggestion in the report says to develop enforcement methods for noncompliance other than the revocation of tax-exempt status.