Camp Proposal would have far-reaching effects for nonprofits
In February 2014, Dave Camp, chairman of the Committee on Ways and Means of the U.S. House of Representatives, unveiled a detailed plan (the Camp Proposal) for the overhaul of the federal tax code. His proposal included a variety of changes that would directly affect nonprofit organizations, including the following:
- The deduction for charitable donations would be limited to contributions in excess of 2 percent of a taxpayer’s adjusted gross income (AGI) and would be capped at 40 percent of adjusted gross income, which is less than the current 50 percent of the AGI limit. It should be noted that, if all of the aspects of the Camp Proposal in other areas impacting individual taxpayers were adopted, an estimated 95 percent of those taxpayers would no longer itemize deductions. Though only 25 percent of the population takes advantage of the charitable contribution deduction, it is perceived that most of these taxpayers give out of generosity and not for tax purposes.
- Unrelated business income tax (UBIT) would no longer be determined on an entity-wide basis, but instead would be calculated separately for each taxable activity. Thus, nonprofits would no longer be able to offset UBTI revenue from one activity with losses from another. In addition, some revenues from sponsorships and royalties from licensing an organization’s name or logo would now be treated as UBIT revenue. Most nonprofits would be able to deduct their first $10,000 in UBTI, which is an increase from the current $1,000 limit.
- Managers of nonprofits that substantially understate UBIT could face penalties of up to $20,000 for unlisted transactions and $40,000 dollars for listed transactions.
- Nonprofits would face a 25 percent excise tax on compensation of more than $1 million paid to any of an organization’s five highest-paid employees.
- Nonprofits would face an excise tax, also known as an intermediate sanction, on excess benefits provided to certain insiders. Under current law, intermediate sanctions are only imposed on the person receiving the excess benefits and, in some cases, on managers of the nonprofit involved. They are not currently imposed on the organization as a whole. The Camp Proposal would also extend these penalties to 501(c)(5) and 501(c)(6) organizations.
- Most private colleges and universities with assets in excess of $100,000 per full-time student would face a 1 percent excise tax on net investment income.
- Donor-advised funds would be required to distribute all contributions within five years of receipt or face an annual excise tax equal to 20 percent of undistributed funds.
- Many nonprofit organizations that are classified as supporting organizations rather than as publicly supported organizations would lose their supporting organization status as a Type II and Type III supporting organization. These organizations would either (1) have to change their organizational structure in order to be classified as a Type I supporting organization (controlled by the public charity), or (2) be faced with private foundation tax status in the future.
It is important to note that these are only proposals that are part of a much larger potential overhaul of the tax code. The Camp Proposal represents a starting point for discussions on tax reform. As such, it is highly unlikely that these changes will be enacted in their current form. Still, it is important for nonprofits to understand and track the progress of the proposals that would affect them. Once proposals like these surface, they often end up being enacted in one form or another.
It is equally important that nonprofits understand what’s driving these proposals. Public charities are involved in a wider range of commercial activities than ever before, and they are using increasingly complex organizational structures to do so. Many in Congress look at organizations generating large amounts of tax-free income from revenue streams associated with licensing and other activities and see what they consider to be an abuse of tax-exempt status. They also look at the large endowments held by some private colleges and universities and question whether such endowments should be wholly exempt from tax.
Of course, in any tax discussion, tax revenue is also an issue. If enacted as written, the Camp Proposal would generate considerable new tax revenue from the nonprofit sector, which would be necessary to help offset the losses in tax revenue that would occur due to other provisions in the Camp Proposal.
These proposals reflect Congressional perception that tax-exempt organizations, especially 501(c)(3) entities, should be held to a higher standard of behavior than other taxpayers. Once suggestions like these are drafted into proposals, it is not unusual for them to be enacted eventually, even many years later. RSM is closely monitoring discussions on Capitol Hill related to tax reform and its potential impact on the nonprofit community as a whole.