Mark Athitakis is a contributing editor to Associations Now.
Tax reform has been a hot topic in Congress over the past year, and seemingly everything is on the table, including nonprofits' activities. Even with the recent release of a formal legislative proposal, real progress on a bill seems unlikely in an election year. Regardless, the smart association is already preparing.
Federal tax law can make a lot of associations anxious. Even if it hasn't actually been passed into law.
Among the many subplots of the drama that is the current Congress has been its ongoing discussion of tax reform and its potential impact on associations. In late February, following months of speculation about proposals in both chambers and discussion drafts in the Senate, Rep. Dave Camp (R-MI), chairman of the House Ways and Means Committee, released draft legislation for a tax-code overhaul. Many elements of Camp's proposal directly target nonprofits: Tax-exempt organizations would pay an excise tax for employees paid more than $1 million a year, for instance. More broadly—and more substantially for many associations—Camp's legislation revises the rules by which organizations pay unrelated business income tax.
Before the announcement, Camp was quiet about his approach to tax reform as it relates to nonprofits. A spokesperson for the Ways and Means Committee emailed a statement that discussed its plans only in broad strokes: "The chairman and the committee have been doing a top-to-bottom review of the code as it works to make the code simpler and fairer and create a climate that spurs job creation, greater investment, and higher wages. To that end, it has reviewed, both in hearings and in the 11 bipartisan tax working groups that were formed to do more in-depth work on the issue, a number of issues pertaining to specific areas of the tax code." The draft legislation reflects concerns about overreaching in terms of compensation and business activities perceived by some lawmakers to be overly detached from nonprofits' missions.
Those themes aren't new. And for the moment, tax reform remains only a matter of possibility. But even before Camp released his draft legislation, statements from both chambers about tax reform understandably pricked up the ears of nonprofit leaders. In a tough post-recession economy, the untaxed revenue that associations generate can look tempting to legislators seeking ways to close budget gaps. Moreover, reports of financial mismanagement in the nonprofit community have provided some legislators with the justification to push such changes forward.
"I think that there are anecdotal issues brewing that lead some in Congress to have more negative feelings about tax-exempt organizations than they otherwise would," says Jerald A. Jacobs, a partner at Pillsbury Winthrop Shaw Pittman LLP and general counsel to ASAE.
So, without actual legislation in play, what can an association do on its members' behalf? A fair amount, both to make its case publicly and to get its house in order.
|Tracking the Tax Writers|
ASAE is closely scrutinizing the comprehensive tax reform draft issued by House Ways and Means Committee Chairman Dave Camp, particularly provisions that would subject certain revenue-generating activities of associations to unrelated business income tax. To stay informed about tax reform and other public policy issues, visit ASAE's Engage website at http://cqrcengage.com/asae.
Every tax reform effort will affect associations differently, and many proposals are in-the-weeds specific to particular industries or professions.
For example, Daniel L. Jaffe, head of the Washington, DC, government relations office of the Association of National Advertisers (ANA), is concerned about a proposal in the Camp bill that would reduce the tax write-off that businesses may take on advertising expenses to 50 percent of their expenses in the first year and amortize the rest over 10 years. (Currently, advertisers can write off 100 percent of ad expenses in the year in which they spend those dollars.)
ANA has fought this battle before, so it's done advance planning for the one brewing this time around. The association has long gathered data on advertising's economic impact, and it typically updates those reports every five years.
But it's moved "a little faster this time," Jaffe says, releasing a new report in early January showing how advertising creates jobs and how amortization structures work against businesses. ANA breaks down this data legislative district by legislative district, a level of detail that's essential for the conversations ANA has with legislators. "We can say [to a member of Congress], 'In your state, this is the impact,' " Jaffe says.
Such tinkering with tax structures is nothing new to associations as a sector of the economy. Substantial changes to tax laws in 1986 and 1990 tweaked rules on tradeshow exemptions and royalty income that have generally worked to the financial benefit of associations. Scrutiny has increased in the past decade, though: Discussions about better financial oversight of nonprofits led in 2009 to the significantly revised Form 990, which now includes specific questions about board structure, compensation, and other organizational issues.
Where is the association sector likely to be confronted on tax reform in 2014? There are several possibilities.
Unrelated business income. "I think the biggest exposure we have as an association community is related to unrelated business income tax," or UBIT, says James W. Rock, vice president of the firm Parry, Romani, DeConcini & Symms and a lobbyist for ASAE. Such concerns aren't new: In the 1990s, members of the Ways and Means Committee criticized the tax-free status of AARP's income from its group health insurance program. And though in 1999 the association received a private letter ruling from the IRS that spelled out the justification for such UBIT programs, they remain a tempting target for legislators. (AARP declined to comment for this story.)
ASAE and others are most concerned with provisions in the Camp bill that would subject income from royalties and certain qualified sponsorship payments to UBIT. Many associations have developed significant royalty revenue streams through the licensing of their names and logos, so this provision would present a considerable new tax burden to those groups. Other provisions would narrow the exception in the UBIT statute for research income and require tax-exempt organizations to calculate separately the net unrelated taxable income of each unrelated trade or business.
Tax exemption of social welfare groups. Another challenge came last November, when the Treasury Department and the IRS invited comments on proposed guidance limiting political activity by 501(c)(4) organizations, also known as social welfare groups. Activities that have a political focus but that do not endorse a political candidate—carrying out voter registration drives, hosting debates—would run afoul of the law if the new guidelines are approved.
Abby Levine, legal director for the Bolder Advocacy Initiative at the Alliance for Justice, an association of social-justice nonprofits, calls the proposed rule change "so overbroad that it blurs the line between what's considered electoral activity and what's speaking out on issues that affect all of us in participating in democracy." Moreover, Levine says, the rules could have an impact on organizations that have affiliated (c)(3) and (c)(6) entities, complicating how they spend money and how money is transferred between them. (In January, Camp submitted a bill that would block the IRS effort.)
Deduction for charitable contributions. The Camp bill provides for a 2 percent floor on charitable deductions, whereby contributions could be deducted only to the extent that they exceed 2 percent of the individual's adjusted gross income. This change could have a sizable impact on nonprofits that have foundations.
The issue has long been on the table, says Steve Taylor, senior vice president and counsel for public policy for the United Way Worldwide. But it's been amplified in recent years, thanks in part to Obama's proposal to cap such deductions at 28 percent. (The cap is currently 39.6 percent.)
In response, more than 70 organizations (including United Way and ASAE) have formed the Charitable Giving Coalition, an advocacy group defending the deduction. In January, Wyden coauthored a letter to the Senate Finance Committee, cosigned by 32 other senators, expressing support for preserving the deduction.
Taylor calls the letter a "huge deal for the sector" but says it doesn't end the discussion. Camp is term-limited out from the Ways and Means Committee in 2015; Rep. Paul Ryan (R-WI), a strong advocate for tax reform, is considered the leading replacement. "The outlook for 2014 is decent, but things can change quickly," Taylor says. "And for sure in 2015 it'll be back in play."
So, what can individual associations do in the face of legislation that challenges the ways they do business? As part of the answer, Jacobs points to a recent investigative report by the Washington Post on financial mismanagement at nonprofits. According to tax filings studied by the Post, more than 1,000 nonprofits in the past five years have acknowledged "significant diversions of funds" ($250,000 or 5 percent of gross revenue) due to embezzlement, theft, fraud, and other reasons. As Jacobs sees it, such news sends a signal to legislators that nonprofits not only have money to burn but are needlessly burning it.
"When that many organizations report the loss of that much money—and how many have lost amounts below that that don't have to be reported?—through bad financial management, inadequate accounting and bookkeeping, that's a bad thing for the tax-exempt community," Jacobs says. "And that's going to influence members of Congress." (For a closer look at the experience of a few organizations that experienced such losses, see "It Could Happen to You" by Joe Rominiecki.)
In other words, responding to tax challenges involves more than just member communication and advocacy. It requires the close, mission-focused attention to finances that gave nonprofits their tax-exempt status in the first place.
Mark Athitakis is a contributing editor at Associations Now. Email: email@example.com