What Tax-Exempt Organizations Need to Know About the Impact of the Tax Reform Act of 2014
March 19, 2014
Amid much fanfare, on February 26 The House Committee on Ways and Means introduced a proposed Discussion Draft entitled "Tax Reform Act of 2014.” This 979-page document seeks to simplify the Internal Revenue Code and would cause sweeping reform of the current code. The proposed legislation will affect individuals, businesses, and tax-exempt organizations. Summarized below are a few of the items that tax-exempt organizations should know about the Tax Reform Act of 2014:
1. Unrelated Business Income Tax. There are numerous proposed changes concerning unrelated business income tax.
Royalties - The proposal modifies the unrelated business income tax treatment of the licensing of an organization's name or logo. Specifically, the proposal provides that any sale or licensing by an organization of any name or logo of the organization (including any trademark or copyright related to a name or logo) is treated as unrelated trade or business that is regularly carried on by the organization.
Separate computations of unrelated business taxable income for each trade or business - For an organization with more than one unrelated trade or business, the proposal requires that unrelated business taxable income be calculated separately with respect to each trade or business. The result would be that a loss from one trade or business would not be able to offset a gain from a different trade or business activity during the same taxable year. Special transition rules would apply for net operating losses arising before enactment.
Increase in the specific deduction against unrelated business taxable income - The proposal would increase the specific deduction from $1,000 to $10,000. Therefore, fewer organizations may need to file a Form 990-T.
Modification of the rules concerning qualified sponsorship payments - The proposal modifies the definition of "qualified sponsorship payment" to exclude from the permitted substantial return benefit the use or acknowledgement of the sponsor's product lines. In other words, if in exchange for a payment from a sponsor the exempt organization uses or acknowledges the sponsor's product lines, the payment is not a qualified sponsorship payment and is therefore subject to unrelated business income tax.
2. Compliance Changes. Penalties would increase, the extension process would be simplified, and e-filing would become mandatory.
Increase in information return penalties - The proposed tax reform doubles many of the daily penalty amounts currently in place. The daily penalty for failure to file an exempt organization or political organization annual information return will increase for most organizations from $20 to $40 and for organizations with gross receipts exceeding $1 million, from $100 to $200. Both failure to make annual returns available for public inspection and failure to make the application for exemption or notice of status available for public inspection would also increase penalties from $20 to $40 a day.
Substantial understatement penalty imposed on organization managers – The proposal would impose a new penalty on organization managers when a substantial understatement penalty attributable to unrelated business income is imposed on the organization. The penalty would be five percent of the underpayment up to a maximum penalty of $20,000.
Extensions - Proposed tax reform would allow for an exempt organization to receive an automatic maximum extension of six months by filing only one extension. This is similar to other types of extensions.
E-filing will be mandatory - The proposed reform extends the requirement to e-file to all tax-exempt organizations required to file statements or returns in the Form 990 series (This includes Form 990T, which previously has not been e-filed). The proposal also requires the IRS to make the information provided on the forms available to the public in a machine-readable format as soon as practicable. It is intended that the information be provided to the public in a format that would permit extraction and the performance of computations on the data, but would not alter or manipulate the statements or returns from which the data was extracted.
3. Charitable Giving Provision. Proposed changes will affect the deduction of charitable contributions for individuals.
Extension of time to file - Under the proposed tax reform, individual taxpayers would be permitted to deduct charitable contributions made after the close of the tax year but before the due date of the return (April 15 for calendar year taxpayers) for the tax year covered by the return.
Two-percent floor - The tax law proposes that an individual's charitable contributions could only be deducted to the extent that they exceed two percent of the individual's adjusted gross income (AGI).
Value of deduction generally limited to adjusted basis - The rules for determining the value of the deduction for contributions of property (e.g., fair market value or adjusted basis) would be simplified. The amount of charitable deduction generally would be equal to the adjusted basis of the contributed property.
The proposed law changes would have a significant effect on all tax-exempt organizations. Although it is widely believed that congressional action is unlikely in the near future, the Discussion Draft is sure to be a starting point for future discussions. Tax-exempt organizations should be familiar with these potential changes and the impact they may have on their organization.