Over the last several months, the U.S. Senate Finance Committee, as part of its tax reform efforts, has issued bipartisan option papers containing reform proposals in all areas of the tax code. On June 13, 2013, the Senate Finance Committee staff released a paper addressing reform proposals for tax-exempt organizations and charitable giving.
The tax-exempt organizations and charitable giving reform proposals include a non-exhaustive list of prominent tax reform options that are not necessarily endorsed by either the Chairman or Ranking Member of the Senate Finance Committee. The reform proposals also enumerated potential goals that the Senate Finance Committee should consider when reviewing the tax laws applicable to tax-exempt organizations and charitable contributions. These goals include maximizing the efficiency and effectiveness of incentives for charitable giving, considering the availability and fairness of such incentives to taxpayers, aligning tax-exempt status with the provision of charitable benefits, examining the relationship between political activity and tax-exempt status, considering the participation of tax-exempt organizations in commercial activity, and improving accountability and oversight.
The list of options available to reform the income tax charitable deduction include:
- Repeal of the deduction.
- Reform of the deduction by: A conversion to a credit. A conversion to matching grants. A cap on the amount or value of the deduction. Expansion of the availability of the deduction to non-itemizers. A limit on organizations eligible to receive deductible contributions to “traditional” charities.
- A conversion to a credit.
- A conversion to matching grants.
- A cap on the amount or value of the deduction.
- Expansion of the availability of the deduction to non-itemizers.
- A limit on organizations eligible to receive deductible contributions to “traditional” charities.
- Increase the effect of incentives on charitable giving by adding a floor, i.e., allow the deduction for contributions in excess of a certain percentage of a taxpayer’s income.
- Incremental reform of the deduction, such as by: Simplifying the deduction by: Repealing limits on the deduction as a percentage of income; Streamlining language and definitions; Carving out the deduction from the overall limit on itemized deductions; or Allowing a deduction for contributions made up until April 15thof the following year. Limiting the deduction for non-cash contributions. Expanding the deduction for non-cash contributions. Disallowing the deduction for contributions to support commercial activities. Modifying the deduction for contributions of conservation easements. Making permanent or expanding tax-free distributions from IRAs for charitable purposes. Reforming reporting and valuation rules, which would include requiring charities to report to the IRS gifts above a certain amount.
- Simplifying the deduction by: Repealing limits on the deduction as a percentage of income; Streamlining language and definitions; Carving out the deduction from the overall limit on itemized deductions; or Allowing a deduction for contributions made up until April 15thof the following year.
- Repealing limits on the deduction as a percentage of income;
- Streamlining language and definitions;
- Carving out the deduction from the overall limit on itemized deductions; or
- Allowing a deduction for contributions made up until April 15thof the following year.
- Limiting the deduction for non-cash contributions.
- Expanding the deduction for non-cash contributions.
- Disallowing the deduction for contributions to support commercial activities.
- Modifying the deduction for contributions of conservation easements.
- Making permanent or expanding tax-free distributions from IRAs for charitable purposes.
- Reforming reporting and valuation rules, which would include requiring charities to report to the IRS gifts above a certain amount.
The list of options to reform the application of the unrelated business income tax on business activities of tax-exempt organizations include:
- Taxing all commercial activities of tax-exempt organizations.
- Revising the requirements for tax-exempt status for organizations engaged in commercial activity by: Disallowing tax-exempt status for certain activities. Imposing requirements on fee-for-service organizations. Providing more certainty regarding activities that may jeopardize tax-exempt status. Reforming requirements for qualification as a tax-exempt hospital. Reforming the treatment of organizations providing commercial-type insurance.
- Disallowing tax-exempt status for certain activities.
- Imposing requirements on fee-for-service organizations.
- Providing more certainty regarding activities that may jeopardize tax-exempt status.
- Reforming requirements for qualification as a tax-exempt hospital.
- Reforming the treatment of organizations providing commercial-type insurance.
- Revising the unrelated business income tax (UBIT) to: Classify certain activities as automatically “unrelated” to exempt purposes. Expand the exemptions from UBIT. Modify the treatment of income from debt-financed property.
- Classify certain activities as automatically “unrelated” to exempt purposes.
- Expand the exemptions from UBIT.
- Modify the treatment of income from debt-financed property.
- Tightening the rules on conversion from tax-exempt to for-profit status.
- Reforming definitions of specific tax-exempt entities (such as professional sports leagues and mutual ditch and irrigation companies).
The list of options to reform the rules regarding political activity and lobbying include:
- Limiting political activity for 501(c)(4), (5), and (6) organizations.
- Changing the categories of tax-exempt organizations that are permitted to engage in political activities.
- Reforming reporting and disclosure rules to: Require certain reporting of involvement in federal elections. Require disclosure of donors for any organization supporting political activity. Increase thresholds for reporting requirements under section 527. Tighten the rules for applying for tax-exempt status for 501(c)(4), (5), and (6) organizations.
- Require certain reporting of involvement in federal elections.
- Require disclosure of donors for any organization supporting political activity.
- Increase thresholds for reporting requirements under section 527.
- Tighten the rules for applying for tax-exempt status for 501(c)(4), (5), and (6) organizations.
- Clarifying whether payments to 501(c)(4) organizations are excluded from gift tax.
- For those 501(c)(4) organizations that engage in lobbying, expanding the prohibition against receiving federal funds to include receiving federal contracts.
Finally, the list of options addresses several broad issues affecting tax-exempt organizations, including:
- Reforming the taxation of private foundations.
- Reforming the taxation of endowments.
- Tightening requirements on donor advised funds and supporting organizations.
- Limiting executive compensation paid by tax-exempt organizations.
- Reforming reporting requirements.
- Developing additional penalties for noncompliance other than revocation of tax-exempt status.
All tax-exempt organizations should follow the tax code reform developments as several of the options raised may affect incentives for charitable giving, as well as the permitted activities of tax-exempt organizations.
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