Reading Between the Lines: “Tax Cuts and Jobs Act 2017”
Editor’s Note: Sandra Swirski and Sara Barba of the Washington, D.C., advocacy firm Urban Swirski & Associates offer regular analysis of public policy developments of interest to Southern grantmakers – reading between the lines so you don’t have to.
Just today, the House Ways and Means Committee released their tax reform legislation, dubbed the “Tax Cuts and Jobs Act.” Republican tax writers have been working for years on a tax overhaul, and it seems this year is their best chance to get something passed. In light of the recently concluded World Series, this week we’ll provide a Win-Loss assessment of key SECF priorities included in the bill, as well as highlight other provisions that the nonprofit sector has been watching.
Universal Charitable Deduction
Several tax reform proposals floated over the past couple years included a significant increase to the standard deduction. However, that would result in fewer taxpayers itemizing and, therefore, fewer would be eligible to take the charitable deduction. In response to that problem, many have been advocating for a charitable deduction to be available to all taxpayers, regardless of whether they itemize.
In October, Rep. Mark Walker (R-NC) released the Universal Charitable Giving Act, which would extend a charitable deduction to non-itemizers that would be capped at one-third of the standard deduction. While the cap raised alarms, it was the only active legislation that would expand the charitable deduction.
However, no version of a universal charitable deduction (Rep. Walker’s or others) was included in the Tax Cuts and Jobs Act. So that’s an L.
However, the bill does raise the AGI limit on cash gifts to charities to 60 percent, up from its current 50 percent limitation. That’s a W.
Private Foundation Excise Tax
The House of Representatives has twice-passed a simplification of the Private Foundation Excise Tax, so it was expected to be included in this bill. The provision would set the tax at a 1.4 percent rate and would eliminate the clause that you can reduce your tax by exceeding your five-year payout average.
It is not the 1 percent rate that was included in Rep. Erik Paulsen’s bill (H.R. 2386), so it will cause some foundations to pay more tax than they’re currently paying. That means less money going to charities. It’s a W for simplification but an L for charity.
SECF has encouraged Congress to expand the IRA charitable rollover to include distributions to donor-advised funds (DAFs), while also discouraging any unnecessary regulations such as mandatory payouts. The expanded rollover was not included in the new legislation, but neither was a payout or spend-down requirement. Instead, there is a reporting requirement for DAF-sponsoring organizations to disclose their policies for inactive funds, as well as the average amount of grants made from their DAFs.
This is a loss when it comes to unlocking more dollars more quickly for charity, but it stops short of new restrictions, so we’ll count it in sum as a W.
Other Nonprofit Issues
The Tax Cuts and Jobs Act also addressed some other policies relevant to the nonprofit sector. Here’s a snapshot of some of them:
Imposes a 1.4 percent excise tax on net investment income of private colleges and universities whose assets are valued of at least $100,000 per full-time student.
Partial Johnson Amendment repeal – permits churches to make statements relating to political campaigns in ordinary course of religious services and activities, with de minimus expenses.
Repeals the Pease Limitation, which gives a haircut to donors on the charitable deduction.
Doubles the threshold for the estate tax and maintains the generation-skipping tax exemption at $10 million, and repeals both after six years.
Adjusts the charitable mileage rate for inflation.
Repeals the exception that relieves a taxpayer from providing contemporaneous written acknowledgement by the donee organization for contributions of $250 or more when the donee organization files a return with the required information.
Imposes a 20 percent excise tax on compensation in excess of $1 million paid to any of a tax-exempt organization’s five highest paid employees for the tax year.
Next week, the Ways and Means Committee will begin marking up the legislation, which allows members of the committee to offer amendments to change the bill. We expect that to start on Monday afternoon and conclude on Wednesday or Thursday. Republican leaders plan to hold a floor vote on the legislation the week of November 13 and hope to send the legislation to the Senate before Thanksgiving.
From the Senate, we expect their version of a tax reform bill in the next two weeks. There are likely to be dramatic differences between the two bills, and the two chambers will have to reconcile those differences.
The good news? The Senate is much more sympathetic to charitable giving and the tax provisions that encourage it, so we look forward to seeing what they come up with. Hopefully more Ws for us. Stay tuned…
Sandra Swirski is a partner at Urban Swirski & Associates; Sara Barba is assistant vice president at the firm.