Senate Finance Committee Report Suggests Ways to Change Government Regulations

Change Government Regulations

On June 13, 2013, the Senate Finance Committee released a cooperative, bipartisan report comprised of suggestions on how (and why) to change government regulations on tax-exempt/nonprofit organizations and on the rules of charitable giving. The Committee’s report set forth a number of issues that need to be addressed in the nonprofit and charitable giving arena, and offer a number of potential solutions. Some of the major concerns that the Committee raised, and suggested for reforms, include:

  • Maximize the efficiency and effectiveness of any incentives for charitable giving/deductions that are retained or reformed
  • Consider whether the availability of tax incentives for charitable giving should be broadened to more taxpayers
  • More tightly align tax-exempt status with providing sufficient charitable benefits
  • Closely examine the relationship between political activity and tax-exempt status
  • Reconsider the extent to which tax-exempt organizations should be allowed to engage in commercial activity
  • Improve the accountability and oversight of tax-exempt organizations

Of the proposed reforms outlined in the report, the proposals that would affect nonprofits the most are as follows:

Charitable Deductions. Setting general limits on charitable deductions for individuals as a share of their adjusted gross income such as:

  • Repeal the charitable deduction altogether
  • Convert the charitable deduction to a refundable or nonrefundable credit
  • Create a flat non-refundable credit of, for example, 12% of charitable contributions
  • Replace the deduction with a refundable tax credit of , for example, 25% for all taxpayers
  • Cap the amount or value of the charitable deduction
  • Allow non-itemizers to claim the charitable contribution deduction

Taxing Nonprofits’ Business Activities. Generally, tax-exempt organizations pay tax on their business activity unless the business activity is related to its tax-exempt purpose or is subject to another exception or exclusion from tax. Tax-exempt organizations are also limited in the amount of unrelated business activity they can engage in. Potential changes to the tax laws include the following:

  • Tax all commercial activities of tax-exempt organizations
  • Revise the requirements for tax-exempt status for organizations engaged in commercial activity
  • Examine the type of tax-exempt organization and impose additional requirements on those organizations
  • Provide charities conducting commercial activity with more certainty of tax-exempt status

Reporting Requirements. Current law requires charities to file a form 990, 990-PF, 990-N or 990-EZ annually. Late filings are subject to penalties. If an organization fails to file for three consecutive years, the IRS automatically revokes the organization’s tax-exempt status. Proposed changes include:

  • Allow charities with up to $1,000,000 in gross receipts to file a simpler form than Form 990
  • Require electronic filing for all 990 Forms
  • Develop enforcement methods other than revocation of tax-exempt status as the only penalty for failure to file

It is encouraging that the issues and potential solutions have been, at least, enumerated. This step is critical to the next step of agreeing on fair and just reform in the laws that govern the nonprofit sector.

Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations.  Ellis is licensed to practice in Washington and Arizona and advises nonprofits on federal tax and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.

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