NonProfitTimes: Exempt Status, Endowments and Donors Targeted in House Bill

Yesterday's NonProfitTimes reported that the U.S. House of Representatives’ Ways and Means Committee had released its budget reconciliation bill and that the bill is everything nonprofit leaders feared. According to the Times, the bill includes everything from granting the U.S. Secretary of the Treasury unilateral authority to revoke the 501(c)(3) tax-exempt status of nonprofits, to taxing foundation endowments, to adding back in a deduction for non-itemizers but at half of what it was prior to it expiring in 2022.

As should be expected, reaction in the nonprofit sector was swift. “The Nonprofit Alliance (TNPA) acknowledges the mixed impact of the House’s draft legislation on the nonprofit sector. We strongly support the proposed above-the-line charitable deduction for non-itemizers,” said Shannon McCracken, CEO, of the Nonprofit Alliance.

However, McCracken stated that she is “deeply concerned” about several provisions that could harm nonprofit operations and philanthropic capacity. According to her, “The incorporation of provisions from last year’s Nonprofit Security and Anti-Terrorism Bill (HR 9495) raises serious concerns for us and our members, many of which were part of the strong sector-wide opposition to measures that could undermine nonprofit independence.” 

Additionally, she explained that the proposed progressive excise tax structure for private foundations could significantly reduce grantmaking capacity, particularly from larger foundations that support critical community needs, and potential expansions of Unrelated Business Income Tax (UBIT) could expose more nonprofit revenue to taxation, threatening financial sustainability.

“TNPA will continue working with lawmakers to strengthen positive provisions while addressing these concerning elements. We urge policymakers to consider nonprofits’ vital role in our communities when finalizing this legislation,” she said.

The Times report continues:

Diane Yentel, CEO of the National Council of Nonprofits, condemned harmful elements of the bill. “This tax bill introduced by House Republicans is a direct assault on organizations that serve the most vulnerable Americans, stepping in to provide support in overlooked communities. Families that rely on church food pantries, veterans that depend on nonprofits for mental health services, moms and babies that receive low-cost health care, and domestic violence survivors living in shelters are all harmed when Congress denigrates nonprofits and makes their work more difficult to do,” she said via a statement.

The statement continued: “The bill hands unchecked power to (U.S. Treasury) Secretary (Scott) Bessent to punish organizations that do not fall in line with the administration’s ideology, by labeling them as terrorist-supporting groups without due process, without a third-party investigation and without public evidence — all while concealing details under the pretext of national security.”

She did applaud the inclusion of the Universal Charitable Deduction. “However, the benefits of this provision are far outweighed by the many damaging aspects of the bill,” according to Yentel.

The proposed legislation also takes aim at colleges and universities. The Times reports that:

Colleges and universities, most notably Harvard University and Columbia University, have been targeted by the Trump Administration including cancelling grants and referring to the schools’ endowments. If this element of the reconciliation bill is included in the final version, private endowments taxes will be 1.39% on foundations with $50 million or less, 2.78% for endowments of between $50 million and $250 million, 5% for endowments of $250 million and less than $5 billion, and 10% on endowments of $5 billion and more.

According to language in the draft: “The assets of any private foundation shall be determined with respect to any taxable year as being the aggregate fair market value of all assets of such private foundation, as determined as of the close of such taxable year. The preceding sentence shall be applied without reduction for any liabilities.”

The bill also proposes an excise tax based on investment income of private colleges and universities that is tied to the number of students:

• 4% in the case of an institution with a student adjusted endowment in excess of $500,000, and not in excess of $750,000;
• 7% in the case of an institution with a student adjusted endowment in excess of $750,000, and not in excess of $1.25 million;
• 14% in the case of an institution with a student adjusted endowment in excess of $1.25 million, and not in excess of $2 million, and;
• 21% in the case of an institution with a student adjusted endowment in excess of $2 million.

As regards pulling a nonprofit’s exempt status, the bill would:

• Grant the Treasury Secretary unilateral authority to revoke the 501(c)(3) tax-exempt status of nonprofits determined by the Treasury Department to provide “material support or resources” in support of terrorism.
• Nonprofits designated as a “terrorist supporting organization” then have 90 days to “cure” the designation by either demonstrating “to the satisfaction of the Secretary” that they did not, in fact, provide such support or resources or made a reasonable attempt to have that support and resources returned to their organization.
• If the Secretary rejects a nonprofit’s attempt to “cure,” the nonprofit can then appeal for a Treasury Department administrative review and then to federal court.

The bill does not explain how a nonprofit would be considered a terror supporting organization. 

Vaughn E. James