Recently, the House Ways and Means Committee Chairman David Camp released a discussion draft of the Tax Reform Act of 2014 (the proposal). At this time it is unclear how much, if any, of the proposal will be enacted but we expect to see serious discussions in Congress surrounding these ideas. There are many elements of the proposal that would result in significant changes for not-for-profit organizations. We summarize these key provisions below:
The proposal would make substantial changes to the charitable contribution deduction for individuals. A few of the more significant changes include:
- Limits the individual charitable contribution deduction to amounts exceeding 2 percent of adjusted gross income (AGI).
- Value of deduction would generally be limited to adjusted basis. Currently most deductions are based on the fair market value of the property contributed.
- Donations of publicly traded stock would still be at fair market value.
- The proposal attempts to simplify the rules regarding AGI limits on differing types of contributions (currently 50 percent, 30 percent or 20 percent depending on the type of property and recipient). Under the proposal the 50 percent and 30 percent categories would be merged as single 40 percent limit.
- The proposal would extend the deadline for making tax deductible donations for a given tax year to April 15 of the following year.
Name and logo royalties
Current law exempts passive royalties received by a not-for-profit for the use of the not-for-profit’s name or logo from unrelated business income tax (UBIT).
Under the proposal, any sale or licensing of the organization’s name or logo, including its trademark or patent, would be subject to UBIT.
Unrelated business taxable income would be calculated separately for each activity
For organizations with more than one unrelated business activity, the loss created by one of the activities is currently available to offset the taxable income from another unrelated business activity.
The proposal would eliminate this offset. Income or loss from each unrelated business activity would be computed independently. Business activities that create net operating losses (NOLs) would be required to follow the general rules for NOLs to carry back or carry forward that activity’s NOL. The organization would no longer be allowed to aggregate the income and loss of multiple unrelated business activities together to arrive at taxable income.
UBIT specific deduction increased
Current laws allow gross unrelated business income (UBI) to be reduced by a specific deduction of $1,000 when calculating taxable income. The specific deduction would be increased to $10,000 under the proposed reforms.
Changes to qualified sponsorships
Existing law treats “qualified sponsorships” the same as contribution revenue, not subject to UBIT. To be eligible for treatment as a “qualified sponsorship,” the payment must not include advertising of the sponsor’s products or services. To avoid treatment as advertising, current IRS guidelines prohibit the use of qualitative or comparative language, price information or inducements to act. If an acknowledgement is deemed be an advertisement, rather than a qualified sponsorship, the payment to the not-for-profit organization must be treated as unrelated business income, subject to unrelated business income tax.
The proposal would impose two important changes.
First, if the acknowledgement mentions the sponsor’s product lines the payment would be treated as the purchase of advertising, subject to UBIT.
Second, there would be new requirements for events that receive over $25,000 in qualified sponsorship payments, establishing the manner in which the donor’s name appears in relation to other donors. The acknowledgement of the sponsor’s name or logo would need to appear with, and in substantially the same manner as a significant portion of other donors. The proposal specifically states that a “significant” portion of other donors would be determined by the total number of donors and shall not be fewer than two other donors. If a single business is listed as an exclusive sponsor of an event that generates more than $25,000 in qualified sponsorship payments, the payment would be treated as advertising taxable income by the not-for-profit organization.
Amateur sports leagues remain exempt under Section 501 (c)(6)
Current law exempts all sports leagues from tax as a Section 501(c)(6) trade or professional association – professional as well as amateur sports leagues.
Under the proposal, professional sports leagues would no longer be eligible for tax-exempt status. Note that amateur sports leagues would continue to qualify as tax-exempt organizations.
Supporting organization Type II and Type III eliminated
Under current law, organizations that support another public charity may be classified as public charities, even though they may not meet the public support test. These supporting organizations are grouped into three types, depending upon how close their relationship is with their supported organization. A Type I supporting organization must be operated, supervised, or controlled by a publicly supported organization. A Type II supporting organization is supervised or controlled in connection with a publicly supported organization. A Type III supporting organization is operated in connection with a publicly supported organization. The closest relationship between supporting and supported organizations is demonstrated with the Type I supporting organization, and it is similar to a parent-subsidiary arrangement.
The proposal would repeal all Type II and Type III supporting organizations. An existing Type II or Type III would need to qualify as a Type I supporting organization (operated, supervised, or controlled by a public charity) by the end of 2015 or be reclassified as a private foundation.
Worker classification safe harbor would require withholding
The proposal establishes a requirement for the employer to withhold 5 percent federal tax on the first $10,000 paid to an independent contractor. The withholding would be credited to the worker’s estimated tax requirements. In addition, there would need to be a written agreement with specified criteria included and a reasonable basis for claiming the safe harbor. If the organization complies with the safe harbor requirements, the IRS wouldn’t be allowed to retroactively reclassify the worker. A worker could still be reclassified from independent contractor to employee status going forward. The proposed safe harbor would protect the organization from the current situation, where large penalties can be assessed for prior years if an individual’s classification is changed by the IRS.
There are many other areas of this proposal that will impact not-for-profits.
For more information on this topic, or to learn how Baker Tilly not-for-profit tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.