CA's Budget & Nonprofits: Part Four
05.25.2023 | Linda J. Rosenthal, JD
Members of Congress are taking their customary six-week summer break, leaving behind a mountain of unfinished business. Among these important matters are fixes for parts of the controversial Tax Cuts and Jobs Act of 2017 (TCJA ‘17) directly or indirectly affecting nonprofit organizations. Since the effective date of January 1, 2018, there’s been little more than hot air and hand-wringing from our distinguished legislators in Washington, D.C.
Fallout from TCJA ‘17
There are several areas of concern stemming from the TCJA ‘17, considered in order below, partly on account of how the issues are proceeding (or not) in Congress.
Repeal of Fringe Benefits UBIT
The TCJA ‘17 added new section 512(a)(7) to the UBIT provisions of the Internal Revenue Code, imposing on nonprofit organizations a 21% income tax on expenses for providing transportation benefits including transit passes and parking. As a result of broad, bipartisan disapproval and strong opposition by 501(c)(3)s, particularly houses of worship, “it has become clear that no one on Capitol Hill supports ” it, but “real action to repeal it is being held hostage of partisan squabbling about every other tax issue.”
There are at least six bills pending in Congress to repeal this tax; many with bipartisan support. All except one were introduced early in 2019 and are pending in the House Ways and Means Committee or Senate Finance Committee.
The newest attempt is Section 401 of H.R. 3300, the Economic Mobility Act of 2019, introduced on June 18, 2019, by House Ways and Means Committee Chair, Rep. Richard Neal (D-MA). The Ways and Means Committee quickly approved it on June 20, 2019. It’s part of a broader tax measure, though, that primarily addresses issues including the earned income tax credit and other assistance for low-income individuals. In advance of the committee hearing, Independent Sector sent a letter of support for this provision.
There was no further action taken before the summer Congressional recess, although “there had been hopes that it would have been included in the separate budget deal passed” by August 1, 2019.
The other pending bills are:
The National Council of Nonprofits suggests that, over the summer recess, all organizations and interested parties “encourage” members of Congress to “cosponsor one of the bills to repeal the tax… and deliver the message: Don’t hold community nonprofits hostage to partisan bickering; repeal the nonprofit transportation tax immediately.”
Repeal of UBIT Silo and Correction of Other TCJA ‘17 Problems
On June 18, 2019, Democratic members of the House Ways and Means Committee introduced a bill to address the unfortunate inclusion of the unpopular UBIT silo provision in the TCJA ’17 as well as the apparently inadvertent omission of paid leave and an adjustment to the volunteer mileage provisions. H.R. 3323, the Nonprofit Relief Act, was presented by Reps. Carolyn Maloney (D-NY) and James Clyburn (D-SC). There are no listed cosponsors yet.
In a news release, Rep. Maloney explains the bill’s key points. In summary:
The National Council of Nonprofits posted a Dear Colleague letter by Rep. Maloney encouraging its members to join as cosigners.
Standard Deduction Change in TCJA ‘17
The dramatic expansion of the standard deduction in TCJA ‘17 was an unwelcome and unexpected surprise for the nonprofit sector that has traditionally relied heavily on the incentive of itemized charitable donation deductions available to a large number of taxpayers.
Recent data shows that this change to the standard deduction has substantially diminished the number of taxpayers eligible to itemize deductions; further, this factor appears to be contributing to a decline in individual charitable giving. According to Dan Cardinali, president and CEO of Independent Sector: “It is time for Congress to recognize this fact by creating a fairer system that helps all Americans, regardless of income, give back to their communities.”
Even before the TCJA ‘17, there was widespread and growing support for a broadening of the availability of tax incentives, including up to the adoption of a so-called “universal tax deduction.” Bills have been introduced in Congress; see, e.g., See H.R. 1260 (Davis) and H.R. 651 (Smith).
The National Council of Nonprofits, echoing other sector leaders, suggests action over this summer recess: “Encourage your Members of Congress to make a clear statement in support of the charitable giving incentive and support a universal (non-itemizer) deduction that provides a tax incentive for all Americans by cosponsoring Universal Deduction legislation.”
New Higher Education Endowment Tax
There have been uncertainties and ambiguities about the scope and application of this selective tax that will affect, in any event, only a tiny number of the wealthiest colleges and universities in the United States. “The tax, which was modeled on the private foundation excise tax, imposes a 1.4 percent levy on net investment income of nonprofit colleges and universities with assets of at least $500,000 per full-time student and more than 500 full-time students.”
There will be no Congressional action, apparently; instead the task of interpreting the new statute that is muddied by drafting deficiencies is left to the rule-making authority of the Internal Revenue Service. The agency recently released proposed regulations under new IRC Code Section 4968, with a deadline for public comment by October 1, 2019. According to an IRS press release, “the guidance clarifies how to determine net investment income, including how to include the net investment income of related organizations and how to determine an institution’s basis in property.”
New Excess Compensation Excise Tax
New Section 4960 imposes an excise tax on tax-exempt organizations in an amount equal to the corporate tax rate (currently, 21 percent) on that portion of a “covered employee’s” pay that exceeds $1 million or is treated as an excess parachute payment. The tax became effective for income earned in 2018.
In Notice 2019-09, issued December 31, 2018, Treasury and the IRS have provided some 90 pages of interim guidance that is primarily structured in a question and answer format and which clarifies many ambiguities in section 4960. (The agency had requested comments by April 2, 2019.)
In addition, at the same time, Treasury and the IRS announced the intention to issue proposed regulations. Any such future regulations will be prospective only and will not apply to taxable years beginning before they are issued. “Until further guidance is issued, employers may base their positions with respect to the excise tax on a good faith, reasonable interpretation of section 4960.”
We’ll revisit these issues after the Congressional summer recess to assess what action may be on the horizon.