19. June 2013 09:51
Last week, the Senate Finance Committee released a 19-page paper outlining tax reform options which would affect tax exempt organizations and charitable giving. The report reviews current law and presents some possible changes in four areas: the charitable deduction, the taxation of nonprofit commercial activity, the political and lobbying activities of exempt organizations, and a final catch-all category for other tax-exempt issues.
While not endorsed by the committee, many of the ideas were from the formal comments submitted to the House Ways and Means Committee tax reform working group on charitable and exempt organizations. This shows that the Senate and House committees are working together and lists the ideas that they have been hearing.
Entitled Tax-Exempt Organizations and Charitable Giving: Senate Finance Committee Staff Tax Reform Options for Discussion, the Senate staff first provides a good overview of current regulations affecting the nonprofit sector. The approximately 1.5 million tax-exempt organizations currently have $2.7 trillion in assets and must meet certain standards to maintain exempt status. Most are required to file annual information returns reporting gross income, disbursements, and other information.
For organizations exempt under IRC 501(c)(3) and (c)(4), there is the possibility of an excise tax when the organization provides a closely related party with an “excess benefit,” but clearer definitions and more rigorous enforcement have been proposed by experts. The proposals include the following:
- Tightening rules for revenue generated in coordination with for-profit partnerships;
- Replacing the current rebuttable presumption rule with a minimum due diligence requirement; and
- Requiring disclosure of compensation studies.
Changes in reporting requirements are also proposed. Now most tax-exempt organizations must file annually with the IRS and make that document public – one exception is that organizations that have commercial business activity unrelated to their mission must file Form 990-T, which is currently not disclosed to the public. One proposal would require tax-exempt organizations to make their Form 990-Ts public. Other ideas are as follows:
- Requiring electronic filing for all 990 forms; and
- Creating a simpler version of Form 990 for charities with up to $1 million in gross receipts.
While these proposals are not yet supported by either of the relevant committees, this report is worth reading to gain some understanding of what might be under discussion as tax reform legislation is crafted. In the meantime, the advice for nonprofits remains the same:
- Carefully report unrelated business income, especially if there are recurring losses, and be sure to allocate organization expenses to these activities accurately.
- Use appropriate comparability data when setting compensation, easily obtained from Forms 990 from similar organizations. Check out ERI’s Nonprofit Comparables Assessor for easy-to-use, affordable data accepted – and in fact used – by the IRS (they hold multiple licenses).
- Report compensation accurately on employment tax returns and on Form 990 – the IRS now checks to see that these two sources match.