House Republicans released their long awaited tax plan this week – The Tax Cuts and Jobs Act. The plan, in its current form, contains some changes that could alter the way nonprofits in the country do business. Below are some of the bigger changes being proposed.
The Johnson Amendment is a provision in the U.S. tax code, since 1954, that prohibits all 501(c)(3) nonprofit organizations from endorsing or opposing political candidates. Many believe that the law has long allowed nonprofits to operate with an independence outside of the partisan world of U.S. politics. Others have complained that it limits the political speech of churches and prevents them from freely supporting or opposing politicians that may or may not support their world views.
The largest criticism of the law is that it gives the IRS too much power to determine if single groups are following the law. To date, only one 501(c)(3) has ever lost its tax exempt status because of the Johnson Amendment.
The Johnson Amendment covers all 501(c)(3)s, but the politics behind its repeal seem to be focused on the political speech of churches and the desire of some churches to be allowed to be more politically active.
Certain nonprofit advocacy groups are not happy with the idea of a Johnson Amendment repeal. Independent Sector call the idea of a repeal “dangerous.”
“[It] opens up places of worship to become an instrument of electoral politics and further blurs the lines between nonpartisan organizations and electioneering,” the organization said in a statement.
A group of more than 4,000 religious leaders from across the U.S. wrote a letter in August of 2017 opposing efforts to repeal the Johnson Amendment, saying it “would harm houses or worship, which are not identified or divided by partisan lines.”
Under the new GOP tax plan, a nonprofits’ five highest paid employees, earning more than $1 million, would have their salaries subject to a 20 percent tax. The tax would also apply to money paid out when top nonprofit executives or college presidents leave an institution. Republicans say that the measure better aligns the tax code with the purpose of nonprofit status, which is to give a tax subsidy to organizations to pursue specific missions.
The nonprofit sector’s greatest fear when it comes to tax reform is how any changes could affect charitable giving. The latest GOP plan makes changes not only to charitable giving but also to individual and household tax deductions that has the sector holding its breath. How will these changes alter the way the average tax payer gives?
The new proposed legislation retains the charitable deduction for those who continue to itemize their tax returns, but changes to individual and household deductions are expected to reduce those who itemize to only 5 percent of all taxpayers. Plus, the new tax plan increases the current AGI limitation for cash contributions to public charities and certain private foundations from 50 percent to 60 percent and retains the 5 year carry-forward provision.
The House plan also attacks a GOP donor gripe – the estate tax. If the law remains unchanged it will repeal the federal estate tax over a period of six years. It doubles the current threshold exemption to over $11 million for individuals and phases out the estate tax between 2018 and 2024. Some experts believe that an Estate Tax repeal could mean fewer dollars being donated to charities from these large estates.
The Tax Cuts and Jobs Act now moves to the Senate for their review and consideration.