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Our View of Tax Reform and Nonprofits

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Nov 8, 2017

On Nov. 16 the House approved H.R.1, The Tax Cuts and Jobs Act by a vote of 227-205. Colorado's Republican Representatives voted for the bill and Democrats voted against it.  The Senate Finance Committee approved its version of the legislation on a party line vote that day. Both bills lower tax rates for many individuals and businesses, repeals many tax credits and deductions, and reduces federal revenues by up to $1.5 trillion over the next decade.

Key Provisions

House/Senate Bill Comparison

Our View

Actions You Can Take

Our Concerns about H.R.1 and the Senate Version 

Both bills undermine key charitable giving incentivesCurrently, the charitable deduction can be taken by the 1 out of every 3 taxpayers who itemize their deductions. By doubling the standard deduction, the charitable deduction can only be taken by the 1 out of every 20 taxpayers who would still itemize their deductions. 31 million fewer taxpayers would take the charitable deduction and Indiana University estimates this change will reduce giving by up to $13.1 billion per year nationally.

Our analysis of 2015 Colorado tax data suggests that most Colorado taxpayers with incomes under $200,000 will save more on taxes by taking the increased standard deduction, leaving no federal tax benefit for them to increase their giving or to give more often. These taxpayers contributed $1.8 billion of the $3.8 billion given in Colorado. If giving is reduced at the same rate as projected by Indiana University, Colorado's charitable giving would be reduced by $194 million per year. 

Universal charitable deduction. We support allowing all taxpayers to deduct their charitable giving. This would make the charitable deduction available to 100 million more taxpayers and increase giving by up to $4.8 billion per year nationally.

Currently, a universal deduction is not part of either bill but several efforts are underway to include it:

  • Senators Debbie Stabenow (D-MI) and Ron Wyden (D-OR) will propose an amendment creating a universal deduction to the Senate Finance Committee
  • The Universal Charitable Giving Act has been introduced in the House (H.R. 3988) and Senate (S.2123) to allow non-itemizers to deduct charitable giving up to 1/3 of the standard deduction

Estate Tax. H.R. 1 doubles the estate tax income exemption for the next six years and repeals the tax permanently thereafter. The Senate version doubles the exemption permanently but does not repeal the estate tax. Without the estate tax, most taxpayers would not pay any federal taxes on unrealized gains of stock, real estate, and inheritances. Only 0.2 percent of estates nationally and 200 Colorado estates owed any estate taxes last year.  

The estate tax is also an important incentive for charitable bequests and large gifts that reduce tax liability for wealthy taxpayers. Colorado’s nonprofits have received over $925 million in gifts of $1 million or more since 2005. In 2010, the tax was not in effect and charitable bequests declined by 37%. In 2011, bequests grew by 92% with the estate tax back in effect. We expect that bequests will similarly decline, particularly if the tax is repealed.

Other provisions. H.R.1  allows taxpayers to donate up to 60 percent of their Adjusted Gross Income (AGI) rather than 50 percent currently. It also adjusts the volunteer mileage rate annually for inflation. These provisions should encourage increased giving and volunteering but are unlikely to offset reduced giving from these other changes.  

Note: The Senate bill doubles the exemption permanently but does not repeal the estate tax. The Senate bill also does not change the volunteer mileage rate.  

H.R. 1 opens the door to politics in the nonprofit sector. H.R. 1 creates 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 take sides in elections and donors could take the charitable deduction for gifts that support political activity. Initially, the Joint Committee on Taxation estimated this will reduce federal revenues by $2.1 billion between 2018 and 2027 attributable to political contributions to churches becoming tax-deductible. But the provision has since been expanded to nonprofits generally. 

This change undermines public confidence that charitable donations will support community services rather than political activities. Increased IRS reporting and enforcement by state charities regulators may result from this change.

Protect Nonprofit Nonpartisanship

Note: The Senate billl does not make any changes to the Johnson Amendment.

Both bills reduce federal revenues which also reduces many nonprofits' services. Reducing federal revenues and spending does not also reduce the needs of our communities. Rather than debating the efficiency and effectiveness of federal programs, this will trigger across-the-board cuts to programs that assist working families and support nonprofits’ services to Colorado’s communities. Nonprofits are asked to fill the gaps of leaner government with even fewer resources. 

Both bills tax particular activities to raise revenue from the nonprofit sector. Taxes on specific activities such as high executive compensation, investment income of private colleges, and sales of research take away revenues from nonprofits' community services.

  • Note: Only the House bill taxes Private Activity Bonds and Private Foundations' investment income.
  • Note: Only the Senate bill applies Unrelated Business Income Taxes (UBIT) to each business or trade or a nonprofit and licensing of an nonprofit's name or logo

The Senate bill burdens nonprofits with modified Intermediate Sanctions rules and taxes. With these changes, the nonprofit organization would be 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 eliminates this special rule but notes 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 treats this as the minimum due diligence standard for nonprofits. 

Relying on professional advice and folllowing the IRS' reasonableness standard are no longer safe harbors to avoid intermediate sanctions. This will likely increase the cost of compliance for nonprofits and liability risks for organizations and board members.