Dear Readers: The predictions of the DC area being buried in snow that we noted in last week’s Snapshot turned out to be very accurate! Despite the federal government being closed on Monday and Tuesday, that didn’t stop some Washingtonians from enjoying a day on Capitol Hill…
Hatch's Tax Reform Plan Could Impact Nonprofits
In addition to Ways & Means Chairman Brady’s efforts to build momentum for tax reform, Senate Finance Committee Chairman Orrin Hatch (R-UT) has made clear his intent to release a proposal for corporate tax reform this year.
Hatch is seeking to reduce the amount of taxes paid by corporations by shifting some of the taxes onto their shareholders rather than cutting the 35% tax rate. One way he is considering to achieve this is by requiring churches, charities, universities, retirement plans, and other tax-exempt entities to begin paying taxes on the dividends they receive from investing in companies.
Though this idea is only currently under consideration for inclusion in a proposal, it demonstrates a real threat should the Chairman and his staff choose to incorporate this option in the final plan—which is expected to be released in March, according to Bloomberg BNA.
First Ways & Means Hearing of the Year Rescheduled
As we reported to you last week, the first Ways & Means hearing of the year is expected to include tax reform as a significant part of the discussion.
Due to the snow, the federal government was closed on Monday of Tuesday of this week. As such, the hearing was rescheduled for Tuesday, February 2nd at 10:00am ET. If you are interested in tuning in, we expect that the hearing will be live-streamed via the Ways & Means website next Tuesday.
Contributing Trustee Compensation to a DAF
The Legal Affairs team received an inquiry recently from a community foundation regarding whether a donor, who serves as a compensated board member of a local for-profit business, could direct his trustee compensation from the for-profit board to his donor advised fund held by the community foundation. Unsure of whether the compensation should be recognized by the donor as taxable income if contributed directly to the donor advised fund for charitable purposes, the community foundation contacted the Council for guidance.
The Council’s legal team advised that the donor’s board compensation may be directed to his donor advised fund, but indicated such compensation may be considered income for which the donor could owe taxes.
Under Section 61 of the Internal Revenue Code, gross income is ambiguously defined as “[A]ll income from whatever source derived . . .” Congress, though, has excluded certain types of compensation from tax. Section 74, Prizes and Awards, is one of those exceptions. Roughly stated, if an individual receives a qualified prize or award and then transfers it to a public charity, that individual would not incur a tax.
The Legal team, however, was reluctant to characterize board compensation as a prize or award, especially when board service is for a for-profit company. Under the Code, the prize or award is given primarily in recognition of “religious, charitable, scientific, educational, artistic, literary, or civic engagement.” And the legal team was unable to relate for-profit board service to this list, given that the constituency for a for-profit board is the company’s shareholders. Legal Affairs distinguished this to nonprofit boards where the board’s constituency is the mission and purpose of the tax-exempt organization (as there are no shareholders), and compensation for nonprofit board service may be considered a prize or award.
Thus, the foundation could accept the board compensation into the donor’s fund, but recommended the foundation inform the donor board member to speak with his tax advisor concerning any tax liability.
For more information on this or any other tricky legal matters, please contact the Council’s Legal Affairs team at firstname.lastname@example.org.
Access to the Council’s legal team is a valuable member benefit. Council attorneys are available to discuss your legal questions and to provide legal information by telephone, email and through our various publications and newsletters. This information is intended for educational purposes and does not create an attorney-client relationship. The information is not a substitute for expert legal, tax or other professional advice tailored to your specific circumstances, and may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.
Exclusive from our colleagues at the National Council of Nonprofits.
The Year Opens with State Budget Challenges and Opportunities
Although policymakers in Illinois and Pennsylvania still have not completed action on budgets that should have started last July, the budget processes are gearing up elsewhere for the fiscal year beginning this July.
Several states facing significant budget deficits are looking at raising revenue. Louisiana is facing a $750 million budget shortfall this budget year that ends June 30 and a deficit for FY 2017 set at $1.9 billion. The newly elected Governor is proposing an immediate sales tax hike, among other things, and may follow the recommendations of advisors in seeking to limit state deductibility of federal itemized deductions. Seeking to fill a $4 billion deficit, Alaska's Governor is proposing budget cuts, a new income tax, and spending some of the Permanent Fund's earnings. Kansas’ Governor Brownback, facing an estimated budget gap of $190 million this year, is proposing diverting funds from early childhood development programs and transportation spending.
Vermont’s Governor proposes closing that state’s $68 million budget gap through increasing fees paid by health providers and mutual funds, and not by restricting the state tax incentive for charitable giving, as was pushed and nearly passed by legislators last year. In West Virginia, the Governor is proposing to close the $350 million gap with new taxes on cigarettes and phone lines. Kentucky’s new Governor is proposing $650 million in “cuts across the board,” including a 4.5 percent reduction in spending in the current fiscal year that ends June 30. Wyoming is facing a $450 million shortfall, leading lawmakers to reject a proposal by the Governor to increase revenue sharing with struggling local governments. Nonprofits are aware that, elsewhere, local governments denied state revenue sharing often try to tax tax-exempt nonprofits.
Not every state is facing budget gaps. Governor Jerry Brown in California is calling for using surplus revenues to build reserves and paying off debt, while also proposing a transportation tax dedicated to rebuilding roads and bridges, a theme common in other states. The Governor in New Mexico is proposing an 84 percent increase in funding of behavioral health services. New funding is proposed in Missouri for K-12 and higher education, while property tax relief is on the agenda in Nebraska.
Op-Ed Calls for the Sector to Strive for Increased Charitable Giving
It’s a new year and a natural time to think about goals. Kevin Murphy, president of the Berks County Community Foundation and immediate past board chair of the Council on Foundations, wrote an insightful op-ed in The Chronicle of Philanthropy this week about goals for the sector.
Murphy celebrates recent legislative victories, like the IRA Charitable Rollover being made permanent, but calls for a higher goal. Namely, increasing charitable giving from its historic rate of 2% of GDP to 3%. Murphy writes, “We have an opportunity, and perhaps an obligation to posterity, to shape a new national debate about the power of charitable giving in our nation. We owe it to those we serve to ignite that debate.”