Nonprofit Law Prof Blog

Exempt Organization Goodies in the Bipartisan Budget Act of 2018

I’m scrolling through the Bipartisan Budget Act of 2018 (the “BBA”)(P.L. No. 15-123 signed on February 9, 2018 – enrolled bill from Thomas.gov here) in my leisure time.   It appears that there are two provisions that directly impact exempt organizations, as follows:

• Section 41109 of the BBA clarifies the application of the investment income excise tax for private colleges and universities. As you may recall, Section 13701 of the legislation formerly known as the Tax Cuts and Jobs Act (TCJA) added new Section 4968, which imposes an excise tax on the investment income of certain private colleges and universities.  This new excise tax only applies to private colleges and universities that have at least 500 students, more than 50% of which are located in the U.S.   The BBA clarifies that this refers to “tuition paying” students only – but of course, it didn't actually give us a statutory definition of “tuition paying.”   Full tuition? External scholarship?  Internal scholarship?  Tuition waiver?  Work study?  Have fun with the counting, university admin types.

• Section 41110 of the BBA contains the Newman’s Own provisions by adding Code Section 4943(g) (h/t to Evelyn Brody for the CT Mirror article). These provisions were originally in the TCJA but were struck by the Senate Parliamentarian for having insufficient budget impact.   I will have more to say about Section 4943(g) in another post.

Unless I missed it (let me  know if I did!), absent from the BBA are the following: (1) the Johnson Amendment provisions that were also struck from the TCJA by the Senate Parliamentarian, and (2) the technical fix to the exempt organization excess compensation excise tax found in new Code Section 4960 that would actually make it applicable public universities - as apparently was originally intended but, as discussed by Professor Ellen Aprill, there was a significant drafting fail.  (I heard a rumor that someone from the IRS agreed at the ABA Tax meeting that the technical fix was, in fact, necessary - can anyone confirm?)   If only there were a process by which Congress could talk to experts like Ellen before it finalized draft legislation…

EWW

GOP Tax Bill and the Impact on Nonprofits

In this article, Stephen Fishman explains that under the new tax bill many nonprofits will likely be liable for additional taxes for unrelated business activity. Previously, nonprofits that operated multiple unrelated business activities could deduct the losses from the one business activity from the profits of another business activity in determining the total amount of net unrelated business income subject to unrelated business income tax. Under the tax reform bill, nonprofits cannot cross apply losses in this manner. This will likely result nonprofits having to pay more unrelated business income tax. The new bill also makes private colleges and universities with at least 500 students and endowments worth at least $500,000 per full-time student subject to a 1.4% excise tax on their net investment income. To learn more about the other changes in the new tax reform, click here: https://www.nolo.com/legal-encyclopedia/gop-tax-bill-and-impact-on-nonprofits.html

 

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Rationales for Nonprofit Tax Exemption

 

In this article, the historical, tax base definition, sovereignty, and subsidiary rationales for why nonprofits are exempt from taxation are examined. The historical rationale explains that one reason nonprofits do not have to pay certain taxes is because its tradition. Dating all the way back to ancient Babylon churches were exempt from paying property taxes. The tax base definition rationale explains that because nonprofits use their income for charitable purposes they must be exempt from taxation. This rationale explains that the tax base does not include religious, educational, and charitable activities meaning that nonprofits should not be taxed. The subsidy rationale explains that because nonprofits have a charitable purpose they lessen the burden of the government. This burden reduction qualifies nonprofits to receive a tax exemption. To learn more about the rationales for why nonprofits are tax exempt, click here: https://www.wagenmakerlaw.com/blog/rationales-nonprofit-tax-exemption

 

 

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Nonprofits Oppose the GOP Tax Bill

In this article, Pam Fessler discusses how nonprofits oppose the GOP tax bill. She says that many nonprofits believe that the tax bill will reduce charitable contributions. She believes that the new tax bill incentivizes people to take the standard deduction instead of itemizing. The new bill raises the standard deduction to $12,000 for individuals and $28,000 for married couples. Majority of people who itemize their tax returns take the deduction for charitable giving. If tax payers start taking the standard deduction, they will not be able to take the deduction for charitable contributions. Nonprofits worry this could cause people to not make donations. For more information about why nonprofits oppose the new tax bill, click here: https://www.npr.org/2017/11/04/561978437/nonprofits-fear-house-republican-tax-bill-would-hurt-charitable-giving

 

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How Tax Reform Will End the Nonprofit Pay Scam

In his article John Novak, discusses how the new tax bill prevents nonprofit corporations from paying executives more than $1million per year. The tax bill accomplishes this by creating a new 21% tax on any organization that pays any of its top five earning employees more than $1million per year. He argues that it is unfair for nonprofits to pay executives like university presidents, college football and basketball coaches, and church executives over $1million per year because American’s are facing rising healthcare bills and tuition costs, all while these nonprofits continue to ask for donations to run their organizations. To learn more about this new tax, click here: https://www.cnbc.com/2017/12/20/tax-reform-smacks-down-excessive-nonprofit-executive-pay-commentary.html

 

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It's Time to End Property Tax Exemption-For Everyone

In this article, David Brunori discusses how some states are proposing to tax nonprofits on property they own. In Maine, the Governor proposed to end property tax exemptions for nonprofits with assets of more than $500,000. He details that both nonprofit organizations and local governments are against this. He then goes on to propose that we end all property tax exemptions. He believes we should end these exemptions because by narrowing the tax base through these exemptions everyone else pays more and because nonprofits use local government services. To learn more about these ideas, click here:  https://www.forbes.com/sites/taxanalysts/2015/02/14/its-time-to-end-property-tax-exemptions-for-everyone/#2312adc57497

 

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Taxing Nonprofits: Is It the Modern Day Solution to Balancing Budgets?

In this article Kelly Phillips discusses several cities’ decisions to tax nonprofit corporations. She details a Rhode Island Mayor’s decision to tax nine previously tax-exempt hospitals, colleges, and universities to raise revenue. She begins by outlining how public perception of taxing nonprofits at the local level is usually viewed negatively because the public believes that since nonprofits do so much good for the community they shouldn’t have to pay taxes. She then begins to discuss how even though nonprofits are tax-exempt from federal income taxes, they can be taxed at the local level. Also, she points out that, to the extent that the nonprofit has income that is not related to its charitable purpose, income can be taxed. To learn more about the rise in cities’ attempts to tax nonprofits, click here: https://www.forbes.com/sites/kellyphillipserb/2011/05/11/taxing-non-profits-is-it-the-modern-day-solution-to-balancing-budgets/#2d2dd6167290

 

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What Nonprofits can Expect to See in the GOP Tax Bill

In this article, Michael Wayland, discusses what Nonprofit entities can expect with the new GOP tax reform. There are many things changing come tax time for these corporations some changes are new excise taxes on selected nonprofits, the treatment of unrelated business income generated by charities, and changes in the tax-exempt treatment of interest income from certain bonds issued by nonprofits. With all of these changes, the repeal of the Johnson Amendment did not make it into the final bill. Many nonprofits were against repealing the Johnson Amendment. To learn more about the tax reform pertaining to nonprofits click here: https://nonprofitquarterly.org/2017/12/18/what-nonprofits-can-expect-in-the-gop-tax-bill/

 

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