Implications for Philanthropy of House vs. Senate Tax Bills

December 18, 2017

With differing versions of the tax bill having passed the House and Senate, the two chambers needed to negotiate a single version through the conference committee process.

The conferees were:

House Conferees: Kevin Brady (R-TX), Fred Upton (R-MI); Rob Bishop (R-UT); Devin Nunes (R-CA); Peter Roskam (R-IL); Diane Black (R-TN); Kristi Noem (R-SD); Don Young (R-AK); John Shimkus (R-IL); Richard Neal (D-MA); Sandy Levin (D-MI); Lloyd Doggett (D-TX); Raúl Grijalva (D-AZ); Kathy Castor (D-FL).

Senate Conferees: Orrin Hatch (R-UT); Mike Enzi (R-WY); Lisa Murkowski (R-AK); John Cornyn (R-TX); John Thune (R-SD); Rob Portman (R-OH); Tim Scott (R-SC); Pat Toomey (R-PA); Ron Wyden (D-OR); Bernie Sanders (I-VT); Patty Murray (D-WA); Maria Cantwell (D-WA); Debbie Stabenow (D-MI); Bob Menendez (D-NJ); Tom Carper (D-DE).

The formal opening meeting of this conference committee occurred on Dec. 13, 2017 at 2:00 p.m. ET—though, informal negotiations were well underway prior to that. The final version of the bill was reported out of committee on Friday, Dec. 15.

The Joint Committee on Taxation (JCT) prepared two analyses comparing both the substance and revenue impacts of each version of the bill. The Council also prepared a side-by-side analysis of the provisions in these bills that would impact philanthropy. 

If you have questions, please contact us at govt@cof.org.

Provision

House Bill (H.R. 1)
as passed by the House on 11/16/17

Senate Bill (S.1)
as passed by the Senate on 12/2/17

Implications for Philanthropy

Individual Income Tax Rates

The House bill would consolidate the number of individual tax bracket to four, at rates of: 12%, 25%, 35%, and 39.5%.

The Senate bill would have seven individual tax brackets at rates of: 10%, 12%, 22%, 24%, 35%, and 38.5%.

Changing the individual income tax brackets will change how much people owe in taxes—regardless of whether that ends up being more or less. This could impact taxpayer behavior in a myriad of ways—from someone owing more in taxes and therefore having less discretionary income, to someone owing less in taxes but also having less of an incentive to make charitable contributions due to a lower rate.

Standard Deduction

The House bill would increase the standard deduction to $12,200 for individuals, $18,300 for heads of household, and $24,400 for married couples.

The Senate bill would increase the standard deduction to $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples.

Increasing the standard deduction as proposed would cause anywhere from 91% to 95% of taxpayers to take the standard deduction instead of itemizing deductions on their taxes. Since the charitable deduction is only available to benefit a taxpayer as an itemized deduction, anyone who chooses to take the standard deduction will not have access to the benefit of the charitable deduction—which has a clear impact on charitable giving behavior.

“Johnson Amendment”

The House bill would permit all 501(c)(3) organizations—not limited to “churches”—to engage in political intervention, as long as it does not incur more than a “de minimis incremental cost.”

If not renewed by a future Congress, these changes would expire after 12/31/23.

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Changing the status quo to permit 501(c)(3) organizations to engage in political intervention would open the door for bad actors to exploit 501(c)(3) charitable status for political gain—compromising the integrity of the sector as a nonpartisan force working to strengthen the public good.

Furthermore, loosening these current restrictions on political intervention would cost the federal government $2.1 billion by incentivizing taxpayers to redirect their political contributions to 501(c)(3) organizations in order to take advantage of the more generous tax deduction versus reporting the contribution as a political donation through traditional channels. This provision threatens the public trust that charitable nonprofits and foundations have worked for decades to earn by tainting the intent of charitable purpose with partisan politics.

Charitable Deduction

Both bills would:

  • Make no change to the charitable deduction, preserving it in its current form;
  • Increase the percentage limitation on AGI for cash contributions to public charities from 50% to 60% (under the Senate version, this would expire 12/31/25, if not renewed by a future Congress);
  • Repeal the Pease Limitation for itemized deductions (under the Senate version, this would expire 12/31/25, if not renewed by a future Congress).

Leaving the structure of the charitable deduction unchanged fails to account for changes made elsewhere in the tax code that would have indirect, negative consequences on charitable giving (i.e. nearly-doubling the standard deduction, repealing the estate tax). A number of studies report consistent estimates that charitable giving would decrease by anywhere from $13.1 billion to $16 - $24 billion. The congressional Joint Committee on Taxation (JCT) also estimates that number of taxpayers and amount they claim in charitable deductions will decrease by approximately 40% (or, $95 billion) under the House bill.

The proposed increase to the percent limitations on AGI and the repeal of the Pease Limitation are positive, as they would allow donors to claim a larger charitable deduction proportional to their income from current law—but there is no evidence to support the idea that these changes will mitigate the large-scale decrease in giving in a significant way.

Itemized Deductions

The House bill preserves the following deductions:

  • Mortgage interest (on new/refinanced mortgages up to $500,000);
  • Charitable contribution;
  • Investment interest;
  • Property taxes (up to $10,000);
  • Certain miscellaneous expenses.

The Senate bill preserves the following deductions:

  • Mortgage interest (on mortgages up to $1,000,000);
  • Charitable contribution;
  • Medical expenses.

If not renewed by a future Congress, these changes would expire after 12/31/25.

The number of, and which, itemized deductions that are preserved will have an impact on the number of taxpayers for whom it makes more sense to itemize rather than taking the standard deduction. Since the charitable deduction is only available to benefit a taxpayer as an itemized deduction, anyone who chooses to take the standard deduction will not have access to the benefit of the charitable deduction—which has a clear impact on charitable giving behavior.

Estate Tax

The House bill doubles the threshold for estates subject to the estate tax from $5 million to $10 million, with a total repeal of the estate tax after 12/31/24.

The Senate bill doubles the threshold for estates subject to the estate tax from $5 million to $10 million, with no mention of repeal.

If not renewed by a future Congress, these changes would expire after 12/31/25.

According to Giving USA 2017, approximately 8% (or $30.36 billion) of all charitable giving comes from giving by bequest. Often times, bequests are planned under consideration of how that charitable contribution will factor in with application of the estate tax. If the estate tax is repealed, taxpayers will have less of an incentive to make charitable bequests as a means of lessening the overall impact of the estate tax.

In 2010, a year in which the estate tax was temporarily repealed, we saw a significant decrease in charitable giving. Studies further estimate that repealing the estate tax now could reduce charitable giving by bequest from anywhere between 12% and 37%.

Charitable Gift Substantiation Alternative

Both bills would eliminate 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.

In 2015, the U.S. Department of Treasury and IRS proposed a rulemaking that would have created an alternative for donors to substantiate their charitable contributions by requiring a donee organization to file a document with the IRS containing detailed information about the gift, instead of the standard method of providing donors with contemporaneous written acknowledgment (a gift receipt).

Essentially, this provision would maintain the burden of substantiating a contribution (for the purposes of a taxpayer claiming the charitable deduction) on the donor rather than transferring the burden to the donee organization.

Unrelated Business Income Tax (UBIT)

The House bill would:

  • Subject all 501(a) organizations to UBIT;
  • Apply UBIT to income from fundamental research that is not made freely available to the public;
  • Treat certain employee fringe benefits as activities that are subject to UBIT;

The Senate bill would:

  • Require that unrelated business taxable income (UBTI) is computed separately for each trade or business activity, as opposed to aggregating all UBTI for the purposes of UBI taxation.

The provisions in the House bill would have a relatively minimal impact on philanthropy, with the exception of the third proposal to treat certain employee fringe benefits as activities that are subject to UBIT. It proposes that certain benefits (such as transportation and on-site gyms) would be characterized as unrelated business activities and would be required to pay a tax on the value of those benefits equal to the corporate tax rate. Further legal research is pending on this issue.

The provision in the Senate bill would present a much greater burden on philanthropy. It is intended largely as a ‘revenue raiser’ (of $3.2 billion over 10 years) to pay for other proposed changes in this bill, and would immensely complicate the administration of legitimate unrelated business activities.

Excess Benefit Transactions

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The Senate bill would impose an excise tax of 10% on exempt organizations (EOs) in situations where an EO knowingly engages in a transaction where a disqualified receives an excess benefit, resulting in a 25% excise tax for the disqualified person. The 10% excise tax on the EO would be in addition to the 25% excise tax on the individual.

This provision in the Senate bill aims to discourage excess benefit transactions by imposing harsher penalties for violations. As long as 501(c)(3) organizations are cautious and take care to avoid situations that result in excess benefit, this provision should have a negligible impact.

Charity-Executive Compensation

Both bills would subject tax-exempt organizations to a 20% excise tax on compensation in excess of $1 million paid to any of its five highest paid employees. 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.

This provision would primarily impact the largest charities—such as hospitals and universities. It is intended as a ‘revenue raiser’ (of $3.6 billion over 10 years) to pay for other proposed changes in this bill, but could have implications for how executives and the tax-exempt organizations they work for report compensation and benefits.

Donor Advised Funds (DAFs)

The House bill would require sponsoring organizations of DAFs to disclose the following on their annual Form 990:

  • Average amount of grants made from DAFs in the previous year;
  • (In)activity policy for DAFs.

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The DAF reporting requirements in the House bill come from a provision that has its roots in negotiations during the summer of 2015 to piece together what became known as the CHARITY Act. The reporting requirements were accepted by the charitable sector in exchange for an expansion of the IRA charitable rollover to allow for distributions to DAFs.

The House bill would require DAF sponsoring organizations to disclose information about the funds they manage without expanding the IRA charitable rollover as was originally intended. The collection of such information would allow the IRS/U.S. Department of Treasury to build a database with information about DAF payout practices that may not take into account the nuances grantmaking from DAFs, but may still be used as the basis for future legislation or regulations.

Private Foundation Excise Tax

The House bill would consolidate the rate at which private foundations are taxed on net investment income from the current two rates to a flat rate of 1.4%.

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Consolidating the current two-tiered structure of this excise tax is positive in that it provides certainty to private foundations with respect to how much they should anticipate (budget) paying from year to year. However, the proposed flat rate of 1.4% is higher than the lower of the two current rates (1%), and many private foundations specifically plan their grantmaking to be subject to the lower rate. This provision is intended as a ‘revenue raiser’ (of $500 million over 10 years) to pay for other proposed changes in this bill, and would be an increased cost for some private foundations.

Exception from Private Foundation Excess Business Holding Tax

The House bill would create 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.

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*Initial versions of the Senate bill included this provision, until it was removed after ruling by the Senate Parliamentarian due to not meeting the Byrd Rule requirements under the rules of reconciliation.

This provision in the House bill would have a relatively narrow scope in terms of impact on philanthropy. If included and passed in the bill that comes out of conference, this provision would primarily benefit the Newman’s Own Foundation due to the way it is structured and integrated with its corporate counterpart.

It is worth noting that the Senate parliamentarian ruled that a provision identical to that which was included in the House bill did not meet the Byrd Rule under the requirements of the reconciliation process. Any changes made to this bill must still pass the Byrd Rule, as the version of this bill to come out of conference must go up for another vote in the Senate. Therefore, without any changes, this provision does not seem likely to make the final cut.

Excise Tax on Private College and University Investment Income

The House bill would subject the investment income of private colleges and universities to a 1.4% excise tax if that university has at least:

  • 500 students;
  • Total assets of $125,000,000 ($250,000 per student)—excluding those assets which are used directly for carrying out the institution’s educational purpose.

Calculation of total assets and net investment income would require the inclusion of all income generated by related organizations (such as university foundations).

The Senate bill would subject the investment income of private colleges and universities to a 1.4% excise tax if that university has at least:

  • 500 tuition paying students;
  • Total assets of $250,000,000 ($500,000 per student)—excluding those assets which are used directly for carrying out the institution’s educational purpose.

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.

This provision would not directly impact charitable grantmaking foundations, but it does reflect a sense of skepticism among lawmakers for endowed funds and the policies and practices for how those funds are distributed.

Art Museums Classified as Private Operating Foundations

The House bill would require all art museums that are currently classified as private operating foundations to be open for admission to the public at least 1,000 hours per year in order to maintain that private operating foundation classification (and as such, be exempt from the 5% payout rate that private non-operating foundations are subject to).

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This provision in the House bill is relatively narrow in scope. It aims to ensure that art collections housed in museums are accessible by the public in exchange for favorable tax treatment. As long as organizations that operate under these criteria ensure access for 1,000 hours per year to avoid penalty, this should have a minimal impact.