Legislation and changes in federal taxes that could impact the charitable sector could come to bear this year, despite slim majorities in a divided Congress.
The battlefield is two infrastructure bills that call for $5 trillion in spending along with some tax cuts and increases in taxes on corporations and wealthy individuals, said Sandra Swirski, founder and partner of Urban Swirski & Associates in Washington, D.C. Nonprofits need to know about these to “avoid bad policy on charitable giving to get in there.”
Swirski was part of a panel “What’s Next in Public Policy for Social Good Organizations” during The Giving Institute’s 30th annual Summer Symposium last week at The Mayflower Hotel in Washington, D.C.
The nonprofit sector has been working on the Universal Charitable Deduction (UCD) for years. “It’s absolutely teed up,” Swirski said, and among the highest priorities that the sector has this year to slot into one of the two infrastructure bills, along with bipartisan support.
The $300 universal charitable deduction enacted during the pandemic expires at the end of the year. Champions of the bill — namely Sens. Lankford (R-Okla.) and Chris Coons (D-Del.) — could aim to include it in the reconciliation process, which would give it a better chance to become permanent, according to Sally Schaeffer, founder of Alexandria, Va.-based Uncorked Advocates and a former policy director for Girl Scouts of the USA.
The Legacy IRA Act would expand the IRA charitable rollover created in 2006, lowering the starting minimum age from 70½ to 65 to make tax-free IRA rollovers up to $400,000 annually to charities. For most working charities, more than 40% of their donors are seniors, Schaeffer said.
The House Ways and Means and Means Committee released a modified version of the bill this past May. A hearing before the Senate Finance Committee is scheduled for Wednesday (tomorrow) with a vote expected in September, according to Schaeffer. “We’re excited about the prospects,” she said.
“It’s fairly rare for the charitable community to have two big issues teed up in one year,” Swirski said. “At the end of the year, it’s possible that the sector could have one, if not two, wins.”
Less likely to be enacted anytime soon is the Accelerating Charitable Efforts (ACE) Act, introduced by Angus King (I-Maine) and Charles Grassley (R-Iowa) last month. The aim is to accelerate giving from donor-advised funds (DAF) to operating charities. “I’m not sure I’ve seen the sector as polarized on an issue, ever,” Swirski said regarding DAF regulations. It’s unlikely to the legislation will pass this year but it’s “almost certain to be part of the debate and discussion for years to come,” she said. While Grassley, a former chairman of the Senate Finance Committee, is well regarded in the space, there is no companion House bill and “no real interest” within the House Ways and Means Committee.
The bill would create two types of DAFs that donors could choose: one in which a donor would get a charitable deduction immediately as they do now but would have to distribute the funds within 15 years; another in which donors would have 50 years to distribute funds but receive the deduction once the charity receives the gift.
Regulations and provisions most likely to be accomplished in Washington are the ones that don’t require approval from Congress, and more specifically, raise revenue.
The Organisation for Economic Co-operation and Development (OECD) is working on a treaty among its 38 member nations that would impose a minimum tax of 15% on corporations to prevent tax shelters. “It doesn’t sound like a lot but 15% is more than a company that currently pays 0%,” said Alex Reid, a partner and chair of the tax -exempt organizations and charitable giving team at the law firm BakerHostetler, headquartered in Cleveland, Ohio. He had a “high degree of certainty” that it will happen.
Why should charities care? Most technology billionaires own shares in their technology companies and happen to be philanthropic, Swirski said. Tech-heavy donors might want to unload high-value assets before a 15% tax hits corporations’ balance sheets, Reid added.
The Biden administration also has proposed a stepped-up basis for taxation of capital gains. Gifts of appreciated stock are popular with donors because they avoid realizing capital gains taxes on appreciated stock. Under the president’s proposal, gifts would be a realization event for tax purposes, as would death. “You would get the same treatment when you die as when you sell that stock,” said Reid, former legislative counsel to the Joint Committee on Taxation. “All that built-in gain is realized and taxed at death.”
If capital gains are taxed on a stepped-up basis, Reid suggested high-net worth individuals may just hold appreciated stocks for the long term to escape taxation. Donors may want to make those contributions before the regulations change. When that would occur is still unclear although in theory, it could be April 23, 2021. “Congress doesn’t really like to have retroactive effective dates and create weird cliffs in the future that might tank the market because everyone’s selling,” Reid said.
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