In February 2016, President Obama delivered his fiscal year-end 2017 budget proposal, which applies to the period beginning in October 2016. The budget makes recommendations to Congress, many of which affect taxation provisions applicable to tax-exempt organizations. Let’s look at how these provisions would be affected.
Volunteer Standard Mileage Rate
Today’s charitable standard mileage rate is 14 cents per mile. The budget proposal would make this rate equal to the rate used for medical and moving expenses, which is established by the IRS. The rate would be adjusted annually. For example, in 2015 the mileage rate for medical and moving expense was 23 cents per mile; for 2016, it’s 19 cents per mile.
The proposal would be effective for tax years beginning after December 31, 2016.
Excise Tax on Private Foundations’ Investment Income
The proposal would simplify the excise tax on private foundations’ net investment income by replacing the current 1 percent or 2 percent rate with a flat 1.35 percent rate. The proposal would repeal the special reduced excise tax rate of 1 percent for private foundations that meet their charitable payout requirements over five years. The proposal’s rate would be effective for tax years after the date of enactment.
Mandatory Electronic Filing
The proposal would require all tax-exempt organizations that file Form 990–series returns to file them electronically. Under existing law, only tax-exempt organizations with $10 million of assets that file at least 250 returns (including Forms W-2 for employees and Forms 1099 for certain service providers) during the calendar year are required to e-file their annual tax return (Form 990) with the IRS. This provision would also require the IRS to make the forms publicly available in a timely manner in a machine-readable format.
Under the proposal, Forms 8872, Political Organization Report of Contributions & Expenditures, also would be required to be submitted electronically.
The effective date for both forms would be for tax years beginning after the date of enactment. Transitional relief would give smaller organizations (and organizations with undue hardship) up to three years to begin electronically filing. The IRS also would have discretion to delay the requirement for e-filing Form 990-T, Exempt Organization Business Income Tax Return, up to three years. A tax-exempt organization’s failure to file electronically would be subject to a $5,000 penalty unless it demonstrated reasonable cause.
Donor Charitable Contribution Limitations and Carryforwards
The proposal would substantially simplify the adjusted gross income (AGI) limitations on tax-deductible contributions.
Under existing law, a donor’s charitable deduction is limited to 50 percent of AGI for cash contributions to public charities and 30 percent of AGI for cash contributions to most private foundations. A donor is also generally limited to 30 percent of AGI for contributions of capital gains property to public charities and 20 percent of AGI for contributions to most private foundations.
The proposal would keep the 50 percent limitation for cash contributions to public charities. All other contributions would be harmonized, subject to a single 30 percent limitation regardless of the organization’s use of the property, the type of property, and the type of organization receiving the donation. The effective date would be for contributions made in tax years beginning after December 31, 2016.
As in past years, the proposal would institute the Buffett Rule, which requires that millionaires pay no less than 30 percent of income—after charitable contributions—in taxes.
The budget proposal would modify and increase the eligibility, reporting requirements, and substantiation for the charitable deduction for donating conservation easements.
Donee organizations would be required to electronically report:
- Deductible contribution of easements
- Descriptions of the property
- Market value of the easement
- Modifications to the property
Such information would also be subject to public disclosure.
The proposal would also introduce a pilot program for nonrefundable credits for contributions of conservation easements. These provisions would be effective after the date of enactment.
Small-Employer Health Insurance Credit
The proposal would expand and simplify the health insurance credit available to small employers as it relates to nonelective contributions to employee health insurance. The definition of includable employees would be modified to include employers with up to 50 full-time equivalent employees.
College Athletic Event Seating Rights
The proposal would repeal the special rule that provides a charitable deduction of 80 percent of the amount paid for the right to purchase tickets for seating at college athletic events. The proposal would be effective for contributions made in tax years beginning after December 31, 2016.
Education and Scholarship
Form 1098-T Modification
Any type of entity that provides an individual with a scholarship or grant that exceeds $500 and isn’t processed or administered by a college or university would be required to file Form 1098-T to report such amount. The proposal would be effective for tax years beginning after December 31, 2016.
Pell Grants, which help low- and moderate-income students afford college, are sponsored by the US Department of Education. The budget proposal would make Pell Grants nontaxable to their recipients regardless of whether they’re used for qualified expenses or for living expenses.
Further, the provision makes it so students who receive a benefit from the American Opportunity Tax Credit (AOTC) wouldn’t see that benefit reduced because they also received a Pell Grant. The proposal would be effective for tax years beginning after December 31, 2016.
Simplifying and Expanding Education Tax Benefits
The proposal streamlines and expands education tax benefits by consolidating the Lifetime Learning Credit into an expanded AOTC. The credit would be available for five years and refundable up to $1,500.
The budget proposal eliminates tax on student loan debt forgiveness and repeals the complex student loan interest deduction for new borrowers. The provisions generally would be effective for tax years beginning after December 31, 2016.
Several provisions in the budget proposal relate to tax-exempt bonds.
Private-activity bonds for qualified public educational facilities would be modified to allow any private person to own or operate the public school facilities. The requirement to transfer the school facility to a public agency would be eliminated. These provisions would be effective after date of enactment.
Tax-exempt bond financing for professional sports facilities would be taxable as private-activity bonds, based on private use of the facility (greater than 10 percent). This would be effective for bonds issued after December 31, 2016.
The proposal would also modify Indian tribal governments’ tax-exempt bonds to permit the issuance of bonds under standards comparable to those that apply to state and local governments. The facilities would still need to be located on Indian reservations, and the restrictions for financing certain gaming operations wouldn’t change. These provisions would be effective as of the date of enactment.
The proposal also simplifies the arbitrage investment restrictions and repeals the $150 million non–hospital bond limitation on qualified 501(c)(3) bonds.
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We’ll continue to provide updates on how the federal budget could impact your organization, so check back regularly or subscribe to our e-mail notifications. If you have questions on the president’s budget proposal or how your not-for-profit could be affected by these provisions, contact your Moss Adams professional.