Tax Policy Issues

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Federal and state tax laws and policies govern many of the operations of charitable nonprofits. 501(c)(3) charitable nonprofit organizations typically are exempt from paying income and property taxes and donations to their work are deductible on federal and most state tax returns. Policymakers regularly review and propose changes to exemptions, operational rules, and giving incentives.

Charitable Giving Incentives

The tax laws may encourage individuals and businesses to give to charitable organizations whose missions they support by providing an itemized deduction or tax credit. The new federal tax law had the unintended consequence of diminishing federal giving incentives. State tax reform efforts in recent years have considered capping or eliminating charitable giving incentives, which would also have adverse effects on charitable giving.

Disaster Tax Relief (Federal)

In recent years Congress has responded to natural disasters by enacting a series of temporary tax provisions to assist taxpayers dealing with the aftermath of natural disasters. The temporary tax packages provide narrow incentives for giving to nonprofits engaged in disaster relief.

Estate Tax (Federal)

The federal estate tax is an essential source of revenue for the federal government and serves as an incentive for wealthier individuals to give back to their communities through charitable nonprofit organizations.

Federal Tax Law – Tax Cuts & Jobs Act

The Tax Cuts & Jobs Act, signed into law by President Trump on Dec. 22, 2017, included numerous provisions that affect the work of nonprofits and the people and communities we serve. With very few exceptions, the bill harmed the ability of charitable nonprofits and foundations to address needs in communities and advance their missions.

Unrelated Business Income Taxes (UBIT)

When tax-exempt charitable nonprofits earn income through an activity that is unrelated to their exempt purposes (such as activity that is commercial in nature, like sales of goods) and the activity is “regularly carried on,” the revenue from the activity may be taxable income under IRS rules for “unrelated business income taxation,” often referred to as “UBIT.”  The 2017 federal tax law imposed new taxes on tax-exempt organizations by expanding UBIT, the second one was later repealed:

  • Tax on “Separate” “Trade or Business” (Silo-ing): The 2017 tax law requires nonprofits calculate their taxes on each “trade or business” separately and not aggregate profits and losses of all entities. The Nonprofit Relief Act of 2019 (H.R. 3323) failed but would have repealed this provision.
  • Tax on Nonprofit Transportation Benefits: The 2017 tax law imposes a 21% UBIT on the expenses nonprofits incur in providing their employees transportation benefits, such as transit passes and parking. This provision was later repealed thanks to strong nonprofit advocacy.

Nonprofit Nonpartisanship (Johnson Amendment)

For more than 65 years, an important provision in the federal tax code has successfully protected charitable nonprofits, religious congregations, and foundations from being hounded by politicians, political operatives, and paid political consultants seeking political endorsements, financial contributions, and more. That provision, sometimes called the Johnson Amendment, provides that in return for its favored tax-status, a charitable nonprofit promises the federal government that it will not endorse or oppose a candidate for public office, and if it does, IRS regulations mandate that the charitable nonprofit will lose its tax-exempt status. (Trends & Policy Issues)

Taxes, Fees, and PILOTs (Payments in Lieu of Taxes) (State)

Every state exempts some or all of the properties owned by charitable nonprofits from property taxes. However, despite a lack of legal authority to do so, some municipalities attempt to impose discriminatory taxes or fees on nonprofits, or demanding so-called “voluntary” payments in lieu of taxes (PILOTs). Different jurisdictions call the assessment different terms – taxes, fees, or PILOTs – but the goal is the same, to divert nonprofit resources away from mission and into government coffers.

Volunteer Mileage Rate (Federal)

Volunteers who drive their vehicles when they perform work on behalf of a nonprofit are restricted in tax law to deducting only 14 cents per mile, a rate that is set in statute and has not been changed in years. 

Filing Requirements for Nonprofits (Federal)

Most charitable nonprofits that are recognized as tax-exempt have an obligation to file an annual information return with the IRS. There are very few exceptions: church-affiliated organizations and governmental organizations are among those not required to file. (Tools & Resources)

Revocation of Tax Exemption (Federal)

If your nonprofit fails to file its annual return (Form 990) for three consecutive years, the IRS will automatically revoke its tax-exempt status. This automatic revocation happens by operation of law – there are no exceptions. (Tools & Resources)

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