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BY GEORGE E. CONSTATINE, ESQ., JEFFREY S. TENENBAUM, ESQ., AND MARK S. GOODRICH, ESQ., OF VENABLE LLP
U.S. House of Representatives Ways and Means Committee Chairman Dave Camp this week released "The Tax Reform Act of 2014," a 979-page sweeping federal tax reform package that, among many other things, addresses a number of rules and laws applicable to tax-exempt organizations, and could impose significant new tax liabilities on nonprofits. While not expected to be voted on this year, many of the proposals could well find their way into law as part of any future federal tax legislation and many of the exempt organization-related proposals would fundamentally change the tax obligations of nonprofits.
The legislation proposes changes that impact both tax-exempt organizations and contributors to exempt organizations. The act would amend which activities and organizations are subject to unrelated business income tax, and would impose new excise taxes and modifications of current excise taxes on certain nonprofit organizations and activities.
Key aspects of the proposed legislation are summarized below. A more detailed article is available here.
Royalties: Fees from the licensing of an organization's name or logo would be treated as expressly subject to UBIT.
Corporate sponsorships: The act proposes to limit the ability of a tax-exempt organization to treat sponsorship payments as not subject to UBIT.
UBIT deductions: Requires tax-exempt organizations to compute UBIT separately for each unique activity that is subject to the tax. Thus, a tax-exempt organization would no longer be able to apply losses from one unrelated activity to offset gains from other such activities.
Changes to intermediate sanctions: Currently, if there are excessive benefits paid to certain insiders of section 501(c)(3) and 501(c)(4) organizations, an excise tax may be imposed on those individuals who so benefit as well as on those organization managers who approved those benefits. These provisions are often referred to as "intermediate sanctions." The act proposes sweeping new changes to the intermediate sanctions regime, including:
• Expanding the coverage of the provisions to apply also to 501(c)(5) and 501(c)(6) organizations;
• Adding a new excessive benefits excise tax, equal to 10 percent of the excess benefit, on the organization if certain minimum standards of due diligence or other procedures were not followed; and
• Doing away with the current law "rebuttable presumption of reasonableness," which gives a presumption that a transaction is not excessive if certain steps are followed.
Compensation tax: The legislation would impose an excise tax of 25 percent on executive compensation (including any parachute payments) over $1 million, to be paid by the organization. This excise tax would apply to any of the five-highest compensated employees of any tax-exempt organization.
ASAE’s public policy experts have been working the tax reform issue for some time in anticipation of the introduction of such a proposal and it is certain that ASAE will focus its efforts going forward on preventing enactment of any problematic provisions.