Public Policy

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The Council has concerns about proposals in recent years that would expand the scope of the unrelated business income tax. Currently under Section 512(a) of the Internal Revenue Code, nonprofits are subject to tax on gross income, minus directly connected expenses, for activities that constitute an "unrelated trade or business." The Code offers a three-pronged test for determining whether a particular activity is an "unrelated trade or business." The activity must be (1) a trade or business that is (2) regularly carried on, and (3) isn't substantially related to the organization's exempt purpose. There are currently many exceptions to what activities qualify as "unrelated trade or business," including exceptions for volunteer services.

The Council opposes any policy proposal that would eliminate types of supporting organizations and reduce the variety and flexibility of charitable giving tools available to foundations and donors alike. Supporting organizations are important charitable tools that donors can use to achieve their specific philanthropic goals. Many of the Council’s members utilize supporting organizations to maximize their impact. Often, a supporting organization manages fundraising or investments for the supported organization to allow it to focus on its core charitable mission, whether grantmaking or providing direct services.

Each year, private foundations are required to pay an annual excise tax equal to 2 percent of their net investment income. If a foundation’s distributions (measured as a percentage of assets) in a given year exceed the average payout rate of the foundation over the preceding five years—by an amount at least as much as the 1 percent tax savings the foundation will enjoy—then this tax is reduced to 1 percent. The Council has strongly advocated for simplifying the private foundation excise tax to a flat rate for over a decade. For the past few years, a flat rate of 1 percent has been floated by policymakers, and the Council supports this simplification.

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