Council on Foundation Summary and Analysis: Tax Cuts and Jobs Act (S. 1)

December 8, 2017

See the Council's statement on Senate passage of S.1 - December 2, 2017.

See the Council's joint letter with Independent Sector and the National Council of Nonprofits in opposition to the Senate tax bill - November 29, 2017.

On November 9, 2017, Republican leaders in the Senate—led by Majority Leader Mitch McConnell (R-KY) and Senate Finance Committee Chairman Orrin Hatch (R-UT)—introduced a bill to reform the United States tax code: the Tax Cuts and Jobs Act (S. 1). The Council opposes this bill as it is currently written and subject to change through the amendment process, given that it does a number of things that would restrict and decrease the charitable giving that our communities rely on.

On November 16, the Senate Finance Committee passed S. 1 on a straight party-line vote of 14-12.

In the early hours of the morning on December 2, the Senate passed its version of the Tax Cuts and Jobs Act (S.1) on a mostly party-line vote of 51-49

With each chamber having passed different versions of the bill, the legislation must go to a conference committee to iron-out the differences and negotiate a single version of the bill that will be put up for another vote in both the House and Senate. If it passes those, it then goes to the President’s desk for signature.

Individual Giving Incentives

Charitable Deduction – Title I, Subtitle D

Current Law: The charitable deduction is a provision which allows individuals to reduce up to 50% of their taxable income by the amount of the charitable contributions they make if they itemize their deductions. As a result, taxpayers generally are not subject to federal income taxes on money they give away to charities. Some limits apply depending on the type of gift (cash, stocks, and real property, for example) and the type of organization receiving the gift.

Proposal: There is no mention of changes to the structure of the charitable deduction in S.1. With no changes from amendments, this provision would be maintained as it is written under current law.

As a result of the changes proposed elsewhere in the bill, the scope and value of the charitable deduction would be significantly reduced. A study by Indiana University estimates that leaving the charitable deduction as it is, while increasing the standard deduction and consolidating/changing the marginal income tax brackets (both included in S.1), would trigger a decrease in charitable giving by up to $13.1 billion over the course of one year. A repeal of the estate tax (included in S.1) would further exacerbate this impact on charitable contributions, given that approximately 8% of all charitable giving comes from bequests (Giving USA, 2017).

A number of other reports on the House tax bill (which includes similar provisions as S.1) estimate that charitable giving will be severely diminished. On Nov. 7, 2017, the Joint Committee on Taxation (JCT) released an analysis of the impact of H.R. 1 on charitable deductions for fiscal year (FY) 2018. Under current law, JCT estimates that 40.7 million taxpayers will claim a total of $241.1 billion in charitable deductions in 2018. Under the Tax Cuts and Jobs Act, only 9.4 million taxpayers will claim a total of just $146.3 billion—a decrease of approximately 40%, or $95 billion. The Tax Policy Center also released a study on Nov. 15, 2017, that estimates H.R. 1 would decrease charitable giving by about $12 - $20 billion in 2018, with an additional $4 billion lost in the long-run due to the repeal of the estate tax. 

Leaving the structure of the charitable deduction unchanged, while making changes to these aforementioned parts of the tax code, will have a significant negative impact on charitable giving. 

NOTE: During the Senate Finance Committee’s markup of the S. 1, Sens. Debbie Stabenow (D-MI) and Ron Wyden (D-OR) offered an amendment that would have created a universal charitable deduction, allowing all taxpayers to claim the charitable deduction, regardless of itemizing status. The amendment failed on a straight party-line vote of 12-14.

When the bill came to the Senate floor for debate by the full chamber, there were two other amendments filed that would have impacted charities and philanthropy. One was filed by Sen. James Lankford (R-OK)—which proposed extending the charitable deduction to all taxpayers, up to one-third of the standard deduction for those who would claim it in addition to the standard deduction. The other was filed by Sen. John Thune (R-SD)—which proposed to incorporate the CHARITY Act, including expanding the IRA charitable rollover to donor advised funds (DAFs), simplifying the private foundation excise tax to a flat rate of 1%, and other provisions to support charitable giving. Neither amendment was actually introduced, and therefore, not incorporated into the final version that passed on the Senate floor.

AGI Limitations for Cash Contributions – Title I, Subtitle D

Current Law: A charitable contribution deduction is limited to a certain percentage of the individual’s adjusted gross income (AGI). The AGI limitation varies depending on the type of property contributed and the type of exempt organization receiving the property. In general, cash contributed to public charities, private operating foundations, and certain non-operating private foundations may be deducted up to 50% of the donor’s AGI. Contributions that do not qualify for the 50% limitation (e.g., contributions to private foundations) may be deducted up to the lesser of (1) 30% of AGI, or (2) the excess of the 50% -of-AGI limitation for the tax year over the amount of charitable contributions subject to the 30% limitation.

Capital gain (i.e., appreciated) property contributed to public charities, private operating foundations, and certain non-operating private foundations may be deducted up to 30% of AGI. Capital gain property contributed to non-operating private foundations may be deducted up to the lesser of (1) 20% of AGI, or (2) the excess of the 30% -of-AGI limitation over the amount of property subject to the 30% limitation for contributions of capital gain property.

Proposal: Increase the AGI limitation for charitable cash contributions from 50% to 60% with no changes proposed for non-cash gifts.

Repeal of the Pease Limitation – Title I, Subtitle D

Current Law: The total amount of itemized deductions (other than medical expenses, investment interest, and casualty, theft, or wagering losses) is limited for certain upper-income taxpayers (sometimes referred to as the “Pease limitation”). This limitation applies on top of any other limitations applicable to such deductions. Under the Pease limitation, the otherwise allowable total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeds a threshold amount. For 2017, the threshold amount is (1) $261,500 for single individuals, (2) $313,800 for married couples filing joint returns and surviving spouses, (3) $287,650 for heads of households, and (4) $156,900 for married individuals filing a separate return. The Pease limitation does not reduce itemized deductions by more than 80%.

Proposal: The Pease Limitation on itemized deductions would be repealed. This removes the cap to the total amount of itemized deductions that upper income taxpayers would be allowed to claim.

Elimination of Alternative Gift Substantiation – Title III, Subtitle B

Current Law: A donor/taxpayer must obtain a contemporaneous written acknowledgement (or a gift receipt) from the charity to which he/she donated $250 (or more) in order to substantiate that contribution for claiming the charitable deduction. As an alternative, the Code provides an option for the charity to file a document with the IRS containing detailed information about the gift and the donor in lieu of providing a gift receipt.

Proposal: Elimination of the alternative gift substantiation, which—in certain cases allows—the donee organization to file a separate document with its annual IRS return rather than provide a contemporaneous gift receipt to donors for contributions exceeding $250.

The idea behind this proposal was initiated under a proposed rulemaking from the IRS in 2015. The Council, and many others, submitted formal comments to oppose the implementation of the rule, stating our concerns with:

  • The administrative burden this process would place on charitable organizations to collect this information from donors;
  • The privacy of donors' sensitive information;
  • The deterrent effect this could have on charities' relationships with their donors; and
  • The "slippery slope" it poses to evolve from an optional method to a mandatory requirement.

In response to the many concerns articulated in the comments received on this matter, the IRS withdrew the proposed rule in January 2016.

All Foundations

Unrelated Business Taxable Income (UBTI) Separately Computed for Each Trade or Business Activity – Title III, Subtitle L

Current Law: Under current law, income subject to unrelated business income tax (UBIT) is based on the gross income of any unrelated trade or business less the deductions directly connected with carrying on such activity. In cases where a tax-exempt organization conducts two or more unrelated trades or businesses, the unrelated business taxable income is the aggregate gross income of all the unrelated trades or businesses less the aggregate deductions allowed with respect to all such unrelated trades or businesses. As a result, losses generated by one unrelated trade or business may be used to offset income derived from another unrelated trade or business.

Proposal: S.1 proposes that each tax-exempt organization (EO) would have to treat each trade or business activity separately for UBIT purposes. Whereas under current law separate trade and business activities could be used to offset UBIT liability (by offsetting losses with income), under this proposal, there would fewer opportunities to do so—with the only offsets allowed being between different tax years for the same trade or business activity.

According to estimates from the Joint Committee on Taxation (JCT), this would generate $3.2 billion in federal revenue over 10 years. Additionally, this would cause a significant administrative burden for foundations.

Modification of Taxes on Excess Benefit Transactions (Intermediate Sanctions) – Title III, Subtitle L

Current Law: Under current law, disqualified persons and managers who engage in excess benefit transactions with tax-exempt organizations (other than private foundations) are subject to an excise tax on the amount of the economic benefit that exceeds the value of the consideration (including the performance of services) received for providing the benefit. A disqualified person (other than a manager acting only in that capacity) is subject to a 25-percent excise tax, and, if such tax is imposed, a manager who knowingly participated in the transaction (unless such participation was not willful and due to reasonable cause) is subject to a 10% excise tax.

However, under Treasury regulations, a manager may avoid the excise tax for knowingly participating in an excess-benefit transaction if the manager relies on advice provided by an appropriate professional, including legal counsel, certified public accountants, and independent valuation experts.

Under Treasury regulations, a tax-exempt organization in certain cases may avail itself of a rebuttable presumption with respect to compensation arrangements and property transfers for purposes of determining if the excise tax applies. If the requirements of the rebuttable presumption are met, the IRS may overcome the presumption of reasonableness if it develops sufficient contrary evidence to rebut the comparability data relied upon by the authorized body.

Proposal: Under S.1, an excise tax of 10% would be imposed on EOs when the excess-benefit excise tax is imposed on a disqualified person. The tax on the organization would not apply if they were to follow minimum standards of due diligence to ensure no excess benefit is provided to a disqualified person.

Additionally, the excise tax is expanded to some 501(c)(5) and 501(c)(6) organizations and it also eliminates the rebuttable presumption of reasonableness contained in the intermediate sanctions regulations.

Excise Tax on Excess Tax-Exempt Organizations Executive Compensation – Title III, Subtitle H

Current Law: Under current law, the business deduction allowed to publicly traded C corporations for compensation paid with respect to chief executive officers and certain highly paid officers is limited to no more than $1 million per year. Similarly, current law limits the deductibility of certain severance-pay arrangements (“parachute payments”). No parallel limitation applies to tax-exempt organizations with respect to executive compensation and severance payments.

Proposal: Tax-exempt organizations would be subject to a 20% excise tax on compensation in excess of $1 million paid to any of its five highest paid employees for the tax year. Compensation would include cash and the cash value of benefits other than payments of a tax-qualified retirement plan and amounts that are excludable from the executive’s gross income.

Once an employee is determined to be one of the five highest compensated employees, the organization is responsible for paying the 20% excise tax on any compensation over $1 million. The excise tax would also apply to “excess parachute payments”—a payment contingent on the employee’s separation from the organization that equals or exceeds three-times the amount of that employee’s base compensation.

Community Foundations

There are no provisions in the Senate bill that would have an impact specific to community foundations. There was an amendment filed by Sen. John Thune (R-SD) to incorporate the provisions included in the CHARITY Act (including those related to DAFs), but it was never raised for a vote to be incorporated into the version of S.1. that was put up for a vote on the Senate floor.  

Private Foundations

There are no provisions in the Senate bill that would have an impact specific to community foundations. There was an amendment filed by Sen. John Thune (R-SD) to incorporate the provisions included in the CHARITY Act (including simplification of the private foundation excise tax to 1%), but it was never raised for a vote to be incorporated into the version of S.1. that was put up for a vote on the Senate floor.  

Other Provisions Affecting Tax-Exempt Organizations

Weakening the “Johnson Amendment” to Allow for Political Intervention by Religious Institutions

Current Law: 501(c)(3) charitable organizations are prohibited from participating in, or intervening in (including the publishing and distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. This prohibition is often referred to as the “Johnson Amendment”—named after then-Senator Lyndon B. Johnson, who introduced it in 1954.

Proposal: There is no mention of changes to the prohibition on political intervention by 501(c)(3) organizations in S.1. This provision would be maintained as it is written under current law.

Exception from Private Foundation Excess Business Holding Tax for Independently-Operated Philanthropic Business Holdings – Title III, Subtitle B *

Current Law: Under current law, a private foundation may not own more than a 20-percent interest in a for-profit business, and any private foundation that does hold an interest in excess of 20% is subject to a 10-percent excise tax based on the value of that excess holding unless the private foundation divests itself of the excess holdings within 5 years of the date of receipt. Any private foundation that does not divest itself of such excess holding in a timely manner may be subject to an additional 200-percent excise tax based on the value of that excess holding. The excess business holding rule also applies to donor advised funds held by public charities.

Proposal: The Chairman's Mark creates an exception for excess business holding tax rules for philanthropic business holdings where a private foundation:

  • Holds all the interests of the business enterprise at all times during the tax year;
  • All the foundation’s ownership interests in the business were acquired under the terms of a will or trust;
  • Directs all profits toward a charitable purpose; and
  • Operates independently from the business enterprise.

*NOTE: This provision was included in the Chairman's Mark that passed out of the Senate Finance Committee, but was removed from S.1 as voted on by the full chamber. The Senate Parliamentarian ruled that this provision did not meet Byrd Rule requirements under the rules of reconciliation.

Excise Tax on Private College and University Investment Income – Title III, Subtitle L

Current Law: Private foundations are subject to an excise tax on their net investment income (see “Simplification of Private Foundation Excise Tax”). This excise tax does not apply to the investment income of public charities—which includes colleges and universities.

Proposal: S.1 proposes that private colleges and universities with at least 500 students and total assets of at least $250,000,000 ($500,000 per a minimum of 500 students; excluding those assets which are used directly for carrying out the institution’s educational purpose) would be subject to a 1.4% excise tax on net investment income. The net investment income upon which the excise tax is assessed is calculated as the total net investment income of the educational institution and its “related organizations”—defined as an organization that:

  • Controls, or is controlled by, the institution;
  • Is controlled by one or more persons that control the institution; or
  • Is a supported or a supporting organization during the taxable year with respect to the institution.

A distinction between this provision and that which was included in the House bill is that calculation of total assets and net investment income would require the inclusion of only the income generated by related organizations (such as university foundations) intended for the use or benefit of the related educational institution. Further, the amount of income by a related organization may only be taken into account for the calculation of total assets and net investment income for a single educational institution.