Is Congress Tipping Its Hand on the Future of Charities and Charitable Deductions?

May 11, 2011

Tax-exempt organizations should be aware of expected hearings to discuss making certain temporary provisions and charitable giving incentives, such as the IRA charitable rollover provision, permanent for the tax-exempt community, according to a Senate Finance Committee aide at the recent Tax Section meeting of the American Bar Association in Washington, D.C. Additional hearings are expected to discuss the charitable limitation on itemized deductions and proposals for a flat excise tax on foundation investment income. As part of a new development, the possibility of hearings on private foundations versus public charities related to the rate of return on tax benefits was also discussed.

Gordon Clay, tax legislative counsel to the Joint Tax Committee, sent a shiver through the audience when he mentioned that new questions are being raised on whether preferential treatment should be given to tax-exempt organizations providing relief for the poor and whether organizations with a direct taxable counterpart should continue to receive tax exemption. These are significant issues for public charities currently struggling to obtain donations in a weak economy, as well as organizations engaging in similar activities carried on by taxable organizations such as nonprofit hospitals. He also noted that the National Commission on Fiscal Responsibility and Reform, formed by President Obama, has offered a specific proposal to replace the charitable deduction with a 12% tax credit above a 2% adjusted gross income floor. If such proposals were enacted, they could have a sea change impact on charities and their ability to raise funds.

While these are merely proposals, the fact that they are being seriously discussed should sound alarm bells for the tax-exempt community.

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