Although we have major concerns about what's in the Tax Cuts and Jobs Act, many significant provisions affecting the nonprofit sector were left out of the bill.
Aside from a few provisions that would have encouraged increased giving and volunteering, advocacy by the nonprofit sector helped remove a number of negative provisions that would have undermined public confidence in nonprofits, taken away fundraising and financing tools, and imposed new taxes on the tax-exempt sector.
The final bill leaves out provisions to increase giving and volunteering. It does not include the nonprofit sector's request to make the charitable deduction available to 100 million more taxpayers, which would increase giving by up to $4.8 billion per year nationally.The Universal Charitable Giving Act was introduced in the House (H.R. 3988) and Senate (S.2123) but not included in the final bill. It would have allowed non-itemizers to deduct giving up to 1/3 of the standard deduction. The final bill also did not adjust the volunteer mileage rate annually for inflation as proposed in the House version.
The final bill leaves out the provision allowing nonprofits to engage in politics. The House version created an exception to the political activity ban (the Johnson Amendment) for communications made by nonprofits. Content must be “in the ordinary course of the organization’s regular and customary activities” and result in only “de minimis incremental expenses.”
Despite appearing to be a narrow exception, nonprofits could have taken sides in elections and donors would be able to take the charitable deduction for gifts that support political activity. The Joint Committee on Taxation estimated this would have reduced federal revenues by $2.1 billion between 2018 and 2027 attributable to $6 to $8 billion of political contributions becoming tax-deductible.
Weakening the Johnson Amendment would undermine public confidence that charitable donations will support community services rather than political activities. Increased IRS reporting and enforcement by state charities regulators would likely have resulted from this change.
As originally drafted, the Senate bill would have burdened nonprofits with modified Intermediate Sanctions rules and taxes. With these changes, the nonprofit organization would have been penalized with a 10 percent excise tax for Excess Benefit Transactions. Current law already penalizes persons responsible for these transactions including board members who approve them and disqualified persons who receive excess benefits.
If a nonprofit manager relies on professional advice to determine compensation, nonprofit boards are absolved of liability for intermediate sanctions currently, The Senate bill would have eliminated this special rule but noted that relying on professional advice "is a relevant consideration in determining the manager knowingly participated in an excess benefit transaction."
Also, under the IRS' Rebuttable Presumption of Reasonableness, compensation is presumed reasonable if the organization avoids conflicts of interest, has documented processes, and uses available comparability data. The Senate bill would have treated this as the minimum due diligence standard for nonprofits.
Relying on professional advice and following the IRS' reasonableness standard would have no longer been safe harbors to avoid intermediate sanctions. This would have increased the cost of compliance for nonprofits as well as liability risks for organizations and their board members.
The final bill does not include several taxes on tax-exempt activities. Taxation of Private Activity Bonds would have affected nonprofits that use these tax-exempt bonds for financing building and construction projects, This includes organizations obtaining financing through the Colorado Educational and Cultural Facilities Authority, the Colorado Housing and Finance Authority, and others.
The final bill also leaves out several provisions applying Unrelated Business Income Taxes to research that is not publicly available and licensing a nonprofit's name or logo.
For foundations, the excise tax for net investment income of private foundations would not be fixed at 1.4 percent rather than varying between 1 and 2 percent. Also, the bill left out a requirement for art museums to be open to the public for at least 1,000 hours per year in order to quality as Private Operating Foundations.
Regarding Donor Advised Funds, annual disclosure of average grant amounts and policies on inactive DAFs was left out of the final bill.
Nonprofit advocacy clearly impacted the content of the tax reform bill even though the most difficult impacts on charitable giving, fundraising, and community services still remain in the bill.