The House of Representatives came down on the charitable sector last week, cutting into charitable coffers with an increased standard deduction and removal of the estate tax.
The Senate bill, released on Thursday, lightens the brunt of some of the House bill’s provisions, but will likely still represent a hurdle for nonprofits as compared to the status quo. The Tax Cuts and Jobs Act sets a slightly lower standard deduction than described in the House bill. The House bill placed the new standard deduction at $24,400 for spouses filing jointly, $18,300 for single individuals with at least one child, and $12,200 for single individuals.
The Senate bill proposes a $24,000 standard deduction for joint filers, $18,000 for heads of households, and $12,000 for individuals. In a statement, Independent Sector leadership expressed concern about the Senate bill’s expanded standard deduction without a proposed universal charitable deduction.
“This will result in a loss of billions of charitable dollars, charities will provide fewer services, help fewer people, and create fewer jobs,” the statement reads.
The Senate bill also maintains an estate tax, unlike the House bill, but doubles the exemption amount from $5 million to $10 million based on 2011 dollars adjusted for inflation. The exemption amount was $5.49 million in 2017.
The maintenance of an estate tax is significant, according to Ray Madoff, professor at Boston College Law School. Estate taxes tend to spur giving. In 2010, when there was no estate tax, bequests decreased 30 percent compared to the previous year, she said.
David Thompson, vice president of public policy for the National Council of Nonprofits, said that it is unclear how many potential donors will be impacted by the increased exemption amount in the Senate bill and its impact on giving. Senators, behind the scenes, varied in position from a full repeal of the estate tax to a stricter bill — the final Senate bill representing a compromise.
Similar softening as compared to the House bill can be found in the 1.4 percent tax on net investment income for private colleges and universities for each taxable year. The Senate bill defines applicable institutions, in part, as those with at least 500 tuition-paying students during the preceding taxable year and an aggregate fair-market value of assets equaling or exceeding $250,000 per student. That sum is up from $100,000 in the House bill. Thompson said that, based on American Council of Education data, only about 60 institutions would now be affected by the tax. A call placed to the council was not returned due to the holiday.
Though the Senate bill is applicable to fewer schools, the impact is still potentially dangerous, Thompson said. An individual contemplating giving a gift to his or her alma mater might, instead, choose to give to his or her spouse’s alma mater or the local soup kitchen as opposed to giving to the university and having some of those dollars taxed.
“It’s Congress saying that these schools have enough money,” Thompson said. “It’s Congress saying who is most deserving and that is not for Congress [to say].”
The broader concern with a tax on large endowments, according to Madoff, is the breaking down of a distinction between foundations and public charities. Under current tax law, private foundations are subject to greater scrutiny and regulation as to how funds are spent, with requirements such as grant payouts of at least 5 percent each year. This distinction is eroded, Madoff said, when taxes on endowments are applied more generally to institutions such as universities.
“The concern would be that this is the camel’s nose under the tent,” she said.
Other key provisions of the Senate bill include:
* A requirement that nonprofits separate each stream of unrelated taxable business income as opposed to compiling an aggregate. “A net operating loss deduction is allowed only with respect to a trade or business from which the loss arose,” according to the Senate bill. The result, according to Thompson, might be decreased creativity among nonprofits in terms of seeking out revenue streams because gains cannot be used to offset losses. If a nonprofit was to gain $10,000 on one program and lose $5,000 on another, it would be taxed on the $10,000 under the Senate bill as opposed to the $5,000 aggregate;
* Unlike the House bill, the Senate bill does not repeal the Johnson Amendment – which prohibits 501(c)(3) organizations from engaging in partisan politics. Independent Sector, in its statement, supported the change. Thompson said that the national council will continue to monitor future versions of the Senate bill as the House bill initially provided an exception to the Johnson Amendment only for houses of worship before expanding to al 501(c)(3) organizations at the last moment; and,
* The Senate bill strikes “professional football leagues” from the description of 501(c)(6) organizations, language that has been in place since 1966. Thompson said that removal of the language has long been a goal of Senate Finance Committee Chair Orrin Hatch (R-Utah) and is not related to President Donald Trump’s recent criticisms of the National Football League (NFL), which dropped its exempt status in 2015.