Urgent Policy Issues Need Immediate Attention
Officials in the U.S. government didn’t take August off; hence this Special Edition of Nonprofit Advocacy Matters, concerning:
The greatest threat to nonprofit nonpartisanship (Johnson Amendment) since the 115th Congress convened, and what you can do about it.
How the Treasury Department and IRS are interpreting the new unrelated business income tax on a nonprofit’s “separate” “trade or business,” plus how that affects your operations and what you can do about it.
Whether the rejection by Treasury/IRS of SALT workaround laws affects state tax-credit programs that promote charitable giving in your state.
Protecting Nonprofit Nonpartisanship
Johnson Amendment at Greatest Risk
In the 18 months since President Trump famously declared that he will “get rid of and totally destroy” the longstanding Johnson Amendment, the House of Representatives has passed three separate bills to curb this vital protection of charitable nonprofits, houses of worship, and foundations from caustic partisan politics. The latest version is in the House appropriations bill that funds the Internal
Revenue Service. It would effectively prohibit the IRS from enforcing the Johnson Amendment against churches for even the most egregious violations, including spending charitable assets to support political candidates. The Senate did not include this or other controversial riders in its version of the appropriations measure.
Is the Risk Real?
The Administration has spent the spring and summer ramping up its rhetoric and actions in opposition to the longstanding Johnson Amendment. The funding bill may be their last chance for a “political win” on politicizing charitable, religious, and philanthropic organizations. Vice President Pence is telling multiple audiences that the Administration will not enforce the Johnson Amendment and continues to push for its repeal. Likewise, very well-funded outside advocacy groups have increased their attacks on the law and those who support it, that is, the vast majority of 501(c)(3)
organizations, as evidenced by the Community Letter in Support of Nonpartisanship.
The differences in the bills now must be resolved by a House-Senate conference committee. The decision whether to keep, reject, or revise the harmful provision in the House bill rests in the hands of “conferees,” the lawmakers who will be negotiating the final language. The conferees have not officially been named, but that hasn’t stopped key appropriators from beginning their “pre-conference” discussions. Senator James Lankford (R-OK), chairman of the Senate’s relevant appropriations subcommittee, acknowledged last week that he and colleagues have begun discussions on spending levels and will soon be turning to consideration of unrelated riders to the legislation, including the anti-Johnson
Amendment provision in the House bill. Senator Lankford is the principal Senate sponsor of a bill to weaken the Johnson Amendment and reportedly was very active last December in working to keep even more destructive House-passed language in the tax bill. While supportive of charitable interests on other issues, nonprofits cannot count on Senator Lankford – or other likely conferees – to protect nonprofit nonpartisanship. Not without considerable, grassroots advocacy!
Take Action Today
Make the Call While Members of Congress Are Back Home
This week (Aug. 27-Labor Day), most Representatives and Senators are back home meeting with constituents and promoting their re-election campaigns in the final days before the very-active legislative period in September. They need to hear this message from you and many others – in person, over the phone, via email, and through social media:
“Partisanship has NO place in charitable organizations – whether churches, charities, or foundations. Oppose all efforts in conference to include a controversial anti-Johnson Amendment rider to the Financial Services spending bill, H.R.6147.”
Go to the Take Action page to learn what more you can do to protect nonprofit nonpartisanship and keep the rancor of partisan politicking out of the nonprofit community.
Regarding “Separate” “Trade or Business”
Government Issues Interim Rule and Request for Comments on Unrelated Business Income Taxes
The Treasury Department and Internal Revenue Service have issued a Request for Comments on proposed interim and transition rules (Notice 2018-67) for interpreting one of the two major changes to nonprofit unrelated business income tax (UBIT) included in federal tax law enacted last December. The new Section 512(a)(6) of the Internal Revenue Code changes the way nonprofits calculate UBIT; instead of aggregating all of their profits and losses from unrelated business activities, nonprofits must now "silo"
their revenues and expenses for each "separate" "trade or business" and pay UBIT on each. Neither of the quoted terms is defined in the law, causing nonprofits, foundations, accountants, and tax lawyers to demand relief and clarity. The proposed rules released last week provide some clear answers
and instructions on how to comply with the law immediately, but many questions remain that must be resolved during the formal rulemaking process.
What about the tax on transportation benefits?
The Treasury/IRS Notice makes only passing reference to the other confusing UBIT provision – the new 21% tax on transportation benefits, such as transit passes and parking, found in Section 512(a)(7). The government has given no indication if or when it will delay implementation of the controversial new tax (effective January 1, 2018) or provide guidance to the hundreds of thousands of nonprofits affected by the tax change.
Go to the IRS public comment form and insist that Treasury and the IRS delay implementing the new UBIT subsections until one year after Final Rules are promulgated. (Fill in "Form 990-T" in the line: Form/Instruction/Publication Number.) Learn more.
In the Notice released August 21, Treasury and the IRS acknowledge the frustration and confusion that nonprofits are experiencing, stating: “There is no general statutory or regulatory definition defining what constitutes a ‘trade or business’ for purposes of the Internal Revenue Code.” The Notice expressly provides that starting on January 1, 2018 (when the tax-law provision took effect) until issuance of final regulations (probably in 2019) nonprofits may rely on a reasonable, good faith interpretation of the UBIT statutes in determining whether their organizations have more than one "trade or business." Specifically, the IRS suggested using the North American Industry Classification System (NAICS) 6-digit codes as a reasonable, good faith interpretation. Practically, this means:
- Nonprofits can combine the revenue and expenses from all advertising activities (e.g. online advertising and ads in a variety of print publications) into one category (NAICS code 541800), since these would all be within the same NAICS code.
- But the NAICS code may not provide clarity for some or many other sources of revenue and expenses. For example, the NAICS has multiple codes relating to rentals. Consequently, rental income and expenses may need to be divided or grouped in other ways, meaning it’s possible that expenses for some types of rentals may not be used to offset income from other types.
A separate question arises when a nonprofit has an ownership interest in a partnership that engages in many “trades or businesses.” For now, the IRS will treat revenue from a partnership as a single "trade or business" if one of two tests is satisfied: the de minimis test (ownership interest of no more than 2%) or the control test (no more than 20% ownership interest and no control over the operations of the business). Revenue from other forms of partnership interests that fail to meet these tests can still be treated as a single "trade or business" during the one-year transition period that runs from August 21, 2018 to August 21, 2019.
Filing Public Comments
The Notice provides a way for nonprofits to comply with the new law and the opportunity to recommend changes to the proposed rule that fix any shortcomings. The first step for any nonprofit potentially affected by this tax is to review the NAICS codes and compare your unrelated business revenue streams to determine which categories apply neatly, and which codes don’t make sense. Treasury and the IRS need to know what works and what parts of their proposed rule must be revised. You can make recommendations by submitting public comments via email to Notice.Comments@irscounsel.treas.gov with reference to Notice 2018-67 in the subject line. The public comment period is open through December 3, 2018. See tips for submitting public comments.
Government Seeks to Block SALT Workaround,
Other Tax Credit-Backed Charitable Donations
Late last week, the U.S. Treasury Department and the Internal Revenue Service announced draft regulations designed to change how the federal government will treat donations to charitable organizations that generate state or local tax credits. The proposal reportedly targets new tax laws in Connecticut, New Jersey, and New York that seek to convert some state and local tax (SALT) payments that are capped at $10,000 under the 2017 federal tax law into uncapped charitable deductions. As written, however, the draft regulations appear also to apply to many programs in the 32 states and the District of Columbia that provide a state or local tax credit when a taxpayer makes a donation to certain nonprofits, such as school choice scholarship funds.
Doing the Math
If a state provides a 70% tax credit for donations to eligible entities (whether government run or charitable nonprofit) the taxpayer makes a $1,000 donation to an eligible entity. The taxpayer receives a $700 state tax credit.
|Effect of Proposed Rule
The taxpayer must reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer's federal income tax return.
Source: Proposed Regulations, Example 1, page 34.
The proposed regulations, if ultimately adopted after a 45-day public comment period and regulatory review process, would require taxpayers to treat the value of tax credits like other benefits received when making a charitable donation, such as subtracting the value or cost of a meal at a charity gala from the charitable deduction. As explained in the Treasury Department news release, the value of a tax credit would have to be deducted from a taxpayer’s deduction. The proposal does not apply to dollar-for-dollar state tax deductions for donations to charitable nonprofits, nor to programs that generate a tax
credit of 15 percent or less.
Notably, the proposed rule does not make a distinction between government-run nonprofits and public charities; donations to either that generate tax credits would have to be reduced by the value of the credit. This would be a change from prior law that permitted full deduction of charitable donations that also allowed taxpayers to apply a tax credit based on that donation to reduce state taxes. The progressive-leaning Institute on Taxation and Economic Policy issued a news release supporting the new approach, saying, “These proposed regulations would address not just the newest SALT cap workarounds, but also a slew
of older private school tax credits that have been abused as profitable tax shelters.” The American Federation for Children, which lobbies for school choice programs, immediately denounced the proposed regulations, asserting they “will harm state tax credit scholarship programs that are currently benefitting more than 250,000 students, most of whom are from lower-income and minority families.”
Whether the approach announced by Treasury and the IRS actually shuts down pre-existing state tax-credit programs is a question that is already generating debate among politicians and tax lawyers. The proposed regulations “rightly close the door on improper tax evasion schemes conjured up by state and local politicians,” according to House Ways and Means Committee Chair Kevin Brady (R-TX), referring to the SALT workaround laws enacted in Northeastern states. He also states, “At the same time, Treasury is clearly seeking to preserve important state tax credit programs that were in place before
tax reform that are genuinely designed to serve local charities, many of them educational.” House Ways and Means Ranking Member Richard Neal (D-MA) claimed the Administration “doubled down on its attack on the middle class,” while focusing most of his concerns on the underlying SALT deduction cap in the law passed last December without a single Democratic vote. The ultimate impact on older tax credit programs likely will be resolved during the regulatory process.
Filing Public Comments
The draft regulations officially published today propose changing how state tax credit programs are treated for charitable tax deduction purposed beginning on August 27. Before the regulations are adopted as final rules, Treasury and the IRS will give consideration to public comments submitted by [October 8, 2018]. A public hearing has been scheduled for November 5. Comments should be submitted electronically, via the Federal eRulemaking Portal (indicate IRS and REG-112176-18). See tips for
submitting public comments.