The Tax Reform Act of 2014’s Effect on Nonprofits

In early 2014, Dave Camp, U.S. Congressman and Chairman of the Ways and Means Committee, unveiled an extensive plan to overhaul the federal income tax code. His legislation is called the Tax Reform Act of 2014, or more simply, the Camp Proposal. It is designed to “fix America’s broken tax code by lowering tax rates, while making the code simpler and fairer for families and job creators.” When most people hear “tax code overhaul” they automatically think of for-profit businesses; however, buried in the 979 pages of proposed legislation are items that will affect all nonprofit organizations.

Some specific aspects of the proposed legislation that would affect nonprofit organizations include:

• Excise tax on highly paid employees. A 25% excise tax would be accessed on compensation over $1 million paid to the five highest paid employees of a nonprofit.

• Excise tax on net investment income. A 1% excise tax on investment income would be accessed on private colleges and universities with assets over $100,000 per full-time student.

• Excise tax on excess benefit transactions. Instead of only taxing the recipient of the excess benefit, as is the case now, the nonprofit would face penalties as well.

• Limits on deductions for charitable contributions. The itemized deduction amount for charitable contributions would be limited to the excess of 2% of adjusted gross income.

• Separation of each Unrelated Business Taxable Income (UBTI) activity. Instead of calculating UBTI for a nonprofit as a whole, each activity would be reported and taxed separately. This means that losses in one activity will not offset gains in another.

• Increased penalties for understatement of UBTI. Fines for nonprofits and their managers who significantly understate their UBTI could be as high as $20,000 for unlisted transactions and $40,000 for listed transactions.

• Changes to the distribution requirements for donor-advised funds. A 20% excise tax would be assessed on all donor-advised funds that are not distributed within 5 years.

• Changes to supporting organization requirements. Nonprofit organizations that are currently classified as supporting organizations would lose their Type II and Type III supporting organization status and become a private foundation or a Type I supporting organization. Type 1 supporting organizations are controlled by the public charity.

Keep in mind that these changes are in the proposal phase and are included in a much, much larger revision of the tax code. As is the case with all things on Capital Hill, many revisions and compromises are expected before anything is passed into law, and BPW will keep you updated as things progress in the year or years to come.

For help with your tax filings or understanding how the Camp Proposal might change your nonprofit, please contact me at (805) 963-7811 or ldunne@bpw.com.