Potential Tax Changes Affecting Non-Profit Organizations

The Tax Reform Act of 2014 is currently in the House of Representatives. This law is a major reform effort and is almost 1,000 pages long. Congress is expected to take action on this proposal after the November elections. While it is often risky to speculate what changes Congress will enact, this proposal has several significant changes that will affect non-profit organizations. In a previous article (Potential Tax Changes Affecting Charitable Contributions) the proposed changes in regard to charitable contributions was discussed. This article deals with other changes that would affect non-profit organizations.

Excise Taxes

The proposed legislation would levy a one per cent excise tax on net investment income of private college endowment funds. This would only apply to schools with investment assets valued at more than $100,000 per-full time student at the close of the preceding tax year. Currently there is no tax on this income unless it is debt-financed. This would apparently not affect most schools, but it could be seen as a foot in the door for future changes.

Private foundations would see the two-tier excise tax on net investment income eliminated and replaced with a single one percent rate. In addition, these organizations would be subject to a new 2.5 percent excise tax penalty when engaging in self-dealing transactions with their insiders, rising to ten percent if the self-dealing involved compensation.

Unrelated Business Income

Several changes are proposed in the area of unrelated business income tax. First, the business taxable income would be computed separately and the tax levied on each separate activity. Organizations would no longer be allowed to net losses against gains from separate activities. The sale or licensing by a tax-exempt organization of its name or logo would be treated as an unrelated trade or business. Royalty income from such licenses would be taxed. This would potentially include income from affinity credit cards and licensing of their name for food or apparel. These changes could be detrimental to non-profit organizations.

Qualified sponsorship rules would be tightened. If an organization mentions the sponsor’s name or product in exchange for a payment, it would be treated per se as taxable advertising income. Also, a new dollar-based restriction on certain qualified sponsorship activities would apply. This could impact organizations such as non-profit radio stations who have “business partnerships” whereby a business name is mentioned as begin a supporter.

Currently, there is a “general deduction” of $1,000 in calculating the net unrelated business income taxable (UBTI). Essentially, this means that the first $1,000 of UBTI is not subject to tax. It is proposed to raise that deduction to $10,000.

Finally, managers would individually be subject to a five percent penalty for understating UBTI. It could be higher if the understatement is caused by a reportable or listed transactions.

Form 990 Filings

• Higher penalties would apply for late, incomplete, or inaccurate Form 990 filings.

• A 25 percent excise tax would be levied on the organization for compensation in excess of $1,000,000 by an exempt organization to its five highest paid employees.

• Donor-advised funds would be required to distribute contributions within five years of receipt or be subject to a 20 percent tax on the undistributed funds.

• Type II and III supporting organizations would be eliminated.

Penalty Taxes on Nonprofit Leaders – Personally

• Penalty taxes for excess benefit transactions would apply to 501(c)(5) organizations (unions) and 501(c)(6) organizations (trade and professional associations).

• A ten percent penalty tax would be imposed on the tax-exempt organization when the excess benefit is imposed on a disqualified person.

• Board members and organization managers would no longer be able to rely on the professional advice safe harbor.

• In setting compensation and addressing related party transactions, board members and managers would be required to apply “minimum due diligence.”

• The definition of disqualified persons would specifically include athletic coaches and investment advisors.

Obviously, a number of changes are being proposed. Time will tell if they will be enacted, and in what form. It is incumbent on those involved with not for profit organizations to be alert to any changes, proposed an enacted. There are likely to be amendments to the law, but this is an indication of the directions Congress seems to be headed.

Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.

Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.

He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.

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