Changing Tax Reform for Exempt Organizations

Looming comprehensive tax reform will affect business, individuals, and non profits alike

September 26, 2014

Traditionally, not-for-profit and charitable organizations have looked forward to some favorable provisions from the IRS. As tax-exempt organizations, they received a bit of leniency in the tax code. They could carry on their good works, and other businesses they operated to support these good works, without too much hassle from the taxing authorities.

Taxpayers also earned some nice benefits for contributing to these tax-exempt organizations. If you donated money or items to these organizations, you could look forward to beneficial write-off on your taxes. Generally, as long as you itemized deductions on your income tax return, you could deduct up to 50 percent of your adjusted gross income for charitable giving, with 20 percent and 30 percent limitations applying in some cases.

With the call for comprehensive tax reform becoming louder and louder, tax-exempt organizations, and those of us who give to them, may be in for a rude awakening. This past February, House Ways and Means Committee Chairman Dave Camp (R-MI) released a discussion draft of legislation for comprehensive tax reform. The draft includes many provisions that, if enacted, could have a major impact on the tax laws for exempt organizations and on charitable giving. Most of these provisions would take effect for tax years beginning after December 31, 2014.

Unrelated Business Income (UBI)

If an exempt organization regularly carries on a business or trade that is not substantially related to its exempt purpose, except to generate funds to carry on that purpose, it is subject to tax on the unrelated business income (UBI) generated from that trade or business. From the sale of merchandise to licensing fees, numerous changes to UBI are being proposed, including:

  • UBI separately computed for each trade or business. If an exempt organization conducts two or more unrelated trades or business, the net unrelated taxable income of each unrelated trade or business would be separately calculated. Given this, losses generated by one UBI activity could not be used to offset income from another UBI activity.
  • Name and logo royalties. The sale or licensing by an exempt organization of its name or logo (including any related trademark or copyright) would generally be treated as an unrelated trade or business regularly carried on by the organization.
  • Qualified sponsorship payments. The exclusion from UBI of qualified sponsorship payments would not apply if, in return for the sponsorship payment, the exempt organization uses or acknowledges any of the sponsor’s product lines.
  • Specific deduction. The specific deduction allowed in calculating unrelated business taxable income (UBTI) would be increased from $1,000 to $10,000.
  • Charitable contribution deduction for trusts. This would be lowered from 50% to 10% of the trust’s UBTI, which is the same limit that applies to corporations.

“Generally, as long as you itemized deductions on your income tax return, you could deduct up to 50 percent of your adjusted gross income for charitable giving, with 20 percent and 30 percent limitations applying in some cases.”

Mandatory Electronic Filing

All tax-exempt organizations that file Form 990 series returns would be required to file electronically, effective for tax years beginning after the date of enactment. The IRS could delay the effective date for small organizations and for the e-filing of Form 990-T for up to two taxable years.

Penalties

  • Increase in information return penalties. The daily penalties on exempt organizations and managers for failure to file various returns, disclosures, or public documents would be doubled,effective for information returns required to be filed on or after January 1, 2015.
  • Manager-level accuracy-related penalty on underpayment of UBI tax. A new 5% penalty (limited to $20,000) would be imposed on managers of a tax-exempt organization when an accuracy-related penalty is imposed on the organization for any substantial understatement of UBI tax.

Charitable Contribution Deduction

  • Two percent floor. An individual’s charitable contributions could be deducted only to the extent they exceed 2% of the individual’s adjusted gross income (AGI).
  • Contributions of appreciated property. The amount of the charitable contribution deduction would generally be equal to the adjusted basis of the property. The deduction would be based on the fair market value of the property (less any ordinary gain) for certain types of property, including publicly traded stock.
  • College athletic event seating rights. The provision allowing a charitable deduction of 80 percent of the amount paid for the right to purchase tickets for athletic events would be repealed.
  • Additional changes. Changes would be made to AGI limitations on individual charitable contribution deductions, qualified conservation contributions, and contributions of intellectual property.

Numerous other provisions related to tax-exempt organizations, and those of us who give to them, are included in Representative Dave Camp’s discussion draft. And while it is unclear whether or when any of the provisions will become law, exempt organizations as well as charitable donors should be prepared. They should consult with their accountant or financial advisor to determine how these and other tax reform proposals, if enacted, would affect their activities or charitable giving plans.

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