A private foundation is generally subject to a two percent excise tax on its net investment income, and this rate is reduced to one percent in any year in which a foundation exceeds the average historical level of its charitable distributions. TRA 2014 had a provision to reduce the excise tax on the investment income of private foundations from two percent to one percent. This provision found its way into the America Gives More Act of 2014, as well as other tax provisions that were passed by the House of Representatives, but ultimately did not become law last year.Meanwhile, the President’s budget contains a proposal to reduce the two percent tax to 1.35 percent across the board. Many in the nonprofit community are opposed to the President’s proposal because it could actually result in a tax increase for organizations that are able to reduce the tax to one percent under the current tax law formula.
These provisions aren’t permanent, but they keep getting renewed every year. Legislation in 2014 would have made permanent the tax-free distributions from individual retirement accounts (IRAs) for charitable purposes, an enhanced deduction for contributions of food inventory and also the tax deduction for charitable contributions by individuals and corporations of real property interests for conservation purposes. The America Gives More Act of 2015 that makes these provisions permanent was passed by the U.S. House of Representatives on February 12, 2015. In order to become law, the Senate will also have to pass the provisions and the legislation will require final signoff by the President.
TRA 2014 had a number of provisions that would have impacted charitable giving, including one that would allow taxpayers to treat charitable contributions made up until April 15 as deductible in the previous year’s taxes. Although this provision surfaced again in 2014, we have not seen it yet this year.Meanwhile, the President’s proposals aim to simplify the rules regarding limitations on the maximum amount of charitable contribution deductions for a single year, regardless of whether contributions are made to public charities or private foundations, whether they are cash or property, and whether they are for the use of the organization. The proposal would also increase the carryforward period for an unused charitable deduction that is in excess of the limits from five years to fifteen years.
New tax bills introduced in the Senate:
Three new tax bills were also recently introduced in the Senate, were vetted in a hearing of the Senate Finance Committee and were approved by voice vote in Executive Session. They include a bill to require the IRS to give an exempt organization 65 days’ notice before it has its exempt status revoked for failing to file information returns (Form 990 series); a bill to make certain agricultural research organizations public charities; and a bill to provide an exception to the private foundation excess business holding rules for certain philanthropic business holdings.
The Tax Reform Act of 2014 contained many legislative proposals for tax exempt organizations including: disallowing losses from one unrelated business income (UBI) activity to offset the income from another UBI activity; changes to the corporate sponsorship and royalty rules; expansion of the reach of intermediate sanctions to 501(c)(5) and (6) organizations; and the imposition of a 25 percent excise tax on compensation paid to a nonprofit organization’s top five executives in excess of $1 million. It is possible that some of these proposals could resurface again in the year ahead.
Gifts to 501(c)(4), (5) and (6) organizations:
Finally, we know that gifts to organizations other than 501(c)(3) organizations do not qualify for charitable deductions. However, whether gifts over $14,000 are subject to the gift tax if made to other nonprofit organizations has never been clear, and there have been times when the IRS has threatened to apply the tax when a gift was made to a 501(c)(4), (5) or (6) organization. To remedy the situation, Ways and Means Oversight Subcommittee Chairman Peter Roskam just introduced H.R. 1104, the Fair Treatment for All Donations Act, which would permanently ensure that donations to 501(c)(4), (5) and (6) organizations are not subject to the gift tax.
Stay tuned to the Nonprofit Standard blog and future newsletters in the weeks and months ahead, as we’ll be keeping a close eye on these proposals as they progress through the legislative process, and will keep you updated.