Tax Reform Act of 2014 – How It Would Impact Nonprofits

March 26, 2015

The Tax Reform Act of 2014 was released on February 26, 2014 by Dave Camp, Chairman of the U.S. House of Representatives Ways and Means Committee. Given that 2014 is an election year, it is unlikely that Congress will vote on the proposal this year and may not for some time. However, if enacted as drafted, the Tax Reform Act would substantially change many of the long-standing laws affecting exempt organizations and could potentially impose significant tax liabilities.

Despite a relatively low chance for enactment this year, the draft legislation contains several exempt organization provisions worth monitoring:

1. Unrelated business income tax. The draft act would reassess the classification of certain types of income currently deemed to be tax-exempt and treat these payments as unrelated business income (UBI). These changes include UBI designation for royalties received for use of an organization’s name or logo, a prohibition on offsetting losses from one UBI activity against UBI income of another activity and significant restrictions to “qualified sponsorship payments” (QSPs). 

   The draft legislation would treat any acknowledgement that refers to a business sponsor’s product line not as a QSP but as advertising (and therefore UBI) and would impose limits on the size/manner of displaying the name/logo of any sponsors to an event where the tax-exempt organization receives $25,000 or more in sponsorship for that single event.

   Further, an exclusive sponsorship of greater than $25,000 for a single event would, per se, be treated as taxable advertising. On a positive note, the “specific deduction” (think exemption) would be raised from $1,000 to $10,000.

2. Excess Benefit Transactions. The provisions of Code section 4958, Tax on Excess Benefit Transactions (informally referred to as “Intermediate Sanctions”), would be expanded to: cover 501(c)(5) and (c)(6) organizations; add a new excise tax on the organization itself for failure to exercise due diligence; remove the “rebuttable presumption” safe harbor; and expand the definition of Disqualified Persons subject to these provisions.
3. 2% floor for individual charitable deductions. Under the proposed act, individuals will only be allowed charitable contribution deductions to the extent that total contributions exceed 2 percent of adjusted gross income.
4. IRS-imposed penalties. The legislation would impose higher penalties on tax-exempt organizations for failure to meet expected filing and transparency requirements, including doubling the already-high penalty for failure to timely file Form 990.
5. Compensation Excise Tax. An excise tax of 25% would be imposed for annual compensation greater than $1 million.

Gelman, Rosenberg & Freedman will continue to monitor updates to the proposed legislation and keep you informed as updates become available.