Budget Proposals Could Impact Private Foundations, Tax-Exempt Organizations

The US Department of the Treasury released its General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals, known as the Greenbook, on March 9, 2023.

The Greenbook contains two proposals that were previously introduced to the Senate and the House of Representatives as part of the Accelerating Charitable Efforts (ACE) Act. The bill proposed new rules for private foundations and donor-advised funds, as well as other provisions that could have an impact on tax-exempt organizations.

While the Greenbook is an important document outlining the administration’s tax policy priorities, it’s only a recommendation—and Congress will decide what gets enacted.

Potential Impacts

Two of the included proposals could have a significant impact on qualifying distributions for private foundations when giving to donor-advised funds. Private foundations are generally required to distribute at least 5% of the total fair market value of their non-charitable use assets from the preceding taxable year or be subject to a 30% excise tax on the undistributed amount.

Under current law, a distribution from a private foundation to a donor-advised fund at a sponsoring organization that’s a public charity are qualifying distributions that count towards the 5%.

The 5% distribution requirement may also be satisfied through payments to a person, including a disqualified person, in exchange for personal services that are reasonable and necessary to carry out the foundation’s exempt purpose.

Private Foundation Contributions to Donor-Advised Funds

Under the Greenbook proposal, private foundations couldn’t meet their distribution obligations through grants to a donor-advised fund unless the donor-advised fund makes a qualifying distribution in the same year. That doesn’t include a distribution to another donor-advised fund—and the burden of proof would be on the private foundation.

This would require private foundations to maintain adequate records or other evidence showing that the donor-advised fund has made a qualifying distribution within the required time frame.

Private Foundation Payments to Family Members

The Greenbook also proposed that paying compensation or reimbursing expenses by a private foundation to a disqualified person—other than a foundation manager of such private foundation who isn’t a member of the family of any substantial contributor—of a private foundation wouldn’t count as a qualifying distribution.

While the self-dealing rule wouldn’t change, and a private foundation could still pay reasonable compensation to a disqualified person for personal services that are reasonable and necessary to carry out the foundation’s exempt purposes, these payments wouldn’t count toward the payout requirement.

Both proposals would be effective after the date of enactment.

GST Tax Characterization

Naming a non-charitable tax-exempt organization as a potential recipient of trust distributions is often enough to avoid imposition of a Generation-Skipping Trust (GST) tax on the trust, even though that organization may be unlikely to ever receive such distribution.

The proposal would change the inclusion of these organizations as permissible beneficiaries to prevent the occurrence of a taxable termination. Specifically, the proposal would ignore trusts interest held by organizations described in Internal Revenue Code (IRC) Section 501(c)(4) through (29), aside from Section 10.

Unrelated Business Income

Tax-exempt organizations that are subject to corporate tax rates for unrelated business income could see a 7% increase in the federal tax rate to 28%, per the Greenbook proposal. This would impact tax years beginning after December 31, 2022.

Excess Remuneration

While the impacts of IRC Section 162(m) on applicable tax-exempt organizations (ATEO) aren’t clear, the proposal would accelerate the effective date of the expanded definition of covered employees, which includes five highest paid employees, from taxable years beginning after December 31, 2026, to taxable years beginning after December 31, 2023.

A new proposed aggregation rule would treat all members of a controlled group as a single employer for purposes of determining the covered employees and applying the deduction disallowance for compensation paid to those employees in excess of $1 million. This would impact tax years beginning after December 31, 2023.

Nonqualified Deferred Compensation (NQNC) Plans

A potential new withholding requirement has been proposed that would require employers to withhold the 20% tax and any applicable interest to satisfy the requirements of IRC Section 409A.

Impacts on Higher Education and Tribes

President Joe Biden proposed a budget that would increase Pell Grants to a maximum of $8,215. Additional funding for community colleges has been proposed to further support the free community college program.

The proposal would extend tax preferred treatment for scholarships and loan repayment programs to certain federal programs, including:

  • Loan repayment programs administered by the Health Resources and Services Administration (HRSA)
  • Scholarship programs administered by HRSA
  • The Indian Health Service (IHS) Scholarship Program and the IHS Loan Repayment Program

In addition, Segal AmeriCorps Education Awards used for current education expenses would be treated as scholarships.

Awards used to repay student loans would be excluded from income.

The provision under the American Rescue Plan Act (ARPA) allowing certain forgiven student loan debt to be excluded from income would be made permanent and effective for tax years after December 31, 2025.

We’re Here to Help

To learn more about the Greenbook and how your organization could be affected, contact your Moss Adams professional. You can also visit our Not-for-Profit Practice.

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