Tax reform is all the rage these days.  The House and Senate released their respective proposals for tax reform with some sweeping changes to tax brackets, individual deductions, tax rates for certain owners of pass-throughs and tax rates for C corporations.  These changes are getting a lot of press, but there are some substantial changes on the table for tax-exempt organizations that seem to be flying under the radar.

If Congress has its way, tax-exempt organizations will not be so tax-exempt anymore.  There are differing proposals from the House and Senate that will no doubt change many times before a final bill comes together, but at this point, there are proposals on the table that would:

  • Apply the excise tax on net investment income of private foundations at a single rate of 1.4%
  • Apply the excise tax on net investment income to private colleges and universities with 500 or more students and endowments above a certain level per student
  • Modify the unrelated business income rules to make income generated from licensing a tax-exempt organization’s name or logo subject to the tax on unrelated business income
  • Eliminate the deduction for amounts paid for college athletic seating rights
  • Eliminate tax-exempt status for professional sport leagues
  • With respect to excess benefit transactions:
    • Impose a tax of 10% of the excess benefits on tax-exempt organizations that engage in excess benefit transactions
    • Eliminate the rebuttable presumption of reasonableness with respect to compensation arrangements and property transfers and establish due diligence procedures instead
    • Extend the intermediate sanction rules to 501(c)(5) and 501(c)(6) organizations

Tax reform is in the beginning stages and there will most certainly be many changes to come before all is said and done, but at this early stage, it is apparent that Congress intends to offset the cost of tax reform, at least in part, with legislation that increases the tax burden of tax-exempt organizations.

For more information, please contact Emily Dorisio in our Lexington office at 859-899-8714.