Last week, House Republicans released an initial draft of their tax reform bill, the Tax Cuts and Jobs Act, which was modified by a subsequent markup by House Ways and Means Committee Chairman Kevin Brady (R-TX). The full House Ways and Means Committee is scheduled to produce an additional markup of the bill this week, and House Speaker Paul Ryan (R-WI) has indicated the bill is on track for a vote before Thanksgiving.
The marquee features of the bill—reductions in tax rates for individuals, corporations and pass-through entities, the elimination of many credits and deductions and a shift to a territorial tax system for multinational corporations—have been widely reported. However, the details of the bill include some less reported changes that might come as a surprise to charitable organizations and donors. In our view, the structure of the bill creates incentives to accelerate charitable deductions in the current year and to consolidate charitable contributions on a going-forward basis. With the pace of substantial donations to private foundations, or PFs, and charitable trusts likely to accelerate, the new tax paradigm will place additional emphasis on navigating the rules that apply to the administration of charitable entities.
Here’s a brief review of the provisions of the tax bill relevant to charitable giving. Please note that this summary is current through Committee Chairman Brady’s markup. These provisions may change as legislative negotiations develop.
Changes to the Charitable Deduction
Under current law, the deduction for charitable contributions is limited to a specified percentage of a donor’s adjusted gross income, which varies based on the type of property contributed and the status of the recipient's organization. The bill would increase the limit applicable to cash contributions, allowing donors to deduct up to 60 percent of their AGI for cash contributions to public charities and private operating foundations known as POFs. The bill would repeal the current rule allowing a charitable deduction for 80 percent of amounts paid for tickets to college athletic events and would provide future inflation adjustments to the per mile amount volunteers can deduct when driving their vehicles in service of a charitable organization.
The bill would also repeal the “donee reporting” exception to Internal Revenue Code Section 170(f)(8), which denies the charitable deduction if a donor fails to obtain from a donee charity a “contemporaneous written acknowledgement” regarding the contribution. The donee reporting exception was originally intended to preserve the charitable deduction if a charity failed to give its donor a proper receipt but nonetheless reported the contribution to the Internal Revenue Service on its tax return. Implementation of the donee reporting exception has been slowly progressing since 2015, when the IRS released proposed regulations and has become an issue in recent tax court litigation. The bill would end the exception altogether, further underscoring the importance of providing appropriate receipts to donors.
Unrelated Business Income Tax
The bill would make two changes to the unrelated business income tax known as UBIT. First, it would clarify that all entities treated as exempt under IRC Section 501(a) are subject to the UBIT. This provision is particularly notable for government pension plans, some of which take the position that the tax doesn’t apply to them due to their status under IRC Section 115(l). Secondly, the bill would clarify that the exclusion from the UBIT for income derived in connection with a research trade or business applies only when the results of the research in question are made freely available to the public.
Investment Taxes on Charitable Organizations
Under current law, the net investment income of a PF is subject to a 2 percent excise tax, which can be reduced to 1 percent if the PF meets certain distribution requirements. The bill would repeal the rules allowing PFs to reduce their tax burden to 1 percent and would reduce the otherwise applicable tax rate on a PF’s net investment income to 1.4 percent.
The bill would also subject certain private colleges and universities, which aren’t currently subject to taxes on their NII due to their status as public charities, to a similar 1.4 percent excise tax. The new excise tax would apply to private colleges and universities that have at least 500 students and have non-charitable use assets valued at $100,000 or more per full-time student.
Private Art Museums
The bill would require art museums claiming status as POFs to be open to the public for at least 1,000 hours annually. This provision is likely an outgrowth of an inquiry last year by the Senate Finance Committee, which expressed concern that some private art museums weren’t providing sufficient public benefit to merit the preferential tax treatment afforded to their donors. Other types of POFs used by art collectors, including those that carry out programs involving the lending of art, wouldn’t be directly affected by the new rules.
Newman’s Own Exception
Newman’s Own Inc., the popular food manufacturer that’s donated all of its after-tax profits to charity since its founding in 1982, was transferred to Newman’s Own Foundation after Paul Newman’s death in 2008. As a PF, the Newman’s Own Foundation is subject to the “excess business holdings” rule, which limits the stake it can hold in a for-profit business under penalty of a 200 percent excise tax. After nearly a decade of aggressive lobbying by Newman’s Own Foundation, the bill would amend the excess business holdings rule to provide a special exception if four criteria are met: (1) a PF owns all of a for-profit business’ voting stock; (2) the PF didn’t acquire its interests by purchase; (3) the for-profit business distributes its net operating income to the PF within 120 days of the close of its tax year; and (4) the for-profit business’ directors and executives aren’t PF insiders.
Political Statements by Religious Organizations
The bill would qualify the so-called “Johnson Amendment,” which prohibits charitable organizations from “participating in, or intervening in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office,” to allow churches, their integrated auxiliaries and conventions or associations of churches to make political statements in the ordinary course of business so long as any associated expenditures are de minimus.
Increased Reporting by Donor-Advised Funds
Unlike PFs, which are required to make annual distributions of 5 percent of their non-charitable use assets, donor-advised funds, or DAFs, aren’t currently required to make mandatory distributions. The bill continues this rule, but would require organizations maintaining DAFs to report the average value of grants made each year as a portion of their endowment and to report whether they have a policy in place regarding the frequency and minimum level of distribution required with respect to donor-advised accounts.