The U.S. House of Representatives Ways and Means Committee recently released the Tax Reform Act of 2014 (“TRA 2014”). This proposed tax reform package contains many provisions that will be of interest to nonprofits. Nonprofit organizations should pay specific attention to the following items, as the discussion continues on the Tax Reform Act of 2014:
Royalties and Corporate Sponsorships. Royalties paid to a tax-exempt organization for the licensing of their name and logo will be treated as unrelated business income tax. Many tax-exempt organizations have developed a steady income stream from licensing their names and logos- the TRA 2014 would discontinue the tax-exemption for such income.
Additionally, organizations will have to change their current corporate sponsorship arrangements. Currently, organizations can receive corporate sponsorship payments in exchange for providing the corporate sponsor with certain benefits. Specifically, tax-exempt organizations will not be allowed to make reference to specific corporate product lines, and will have additional restrictions placed on the use of a sponsor’s name when the organization receives more than $25,000 for the sponsorship of a single event.
Excise Taxes (Intermediate Sanctions). Excise taxes (intermediate sanctions) are assessed if an organization makes excessive payments to an insider of 501(c)(3) and 501(c)(4) organizations. The TRA 2014 will expand the applicability of these intermediate sanctions by: (i) expanding coverage of the provision o apply to 501(c)(5) and 501(c)(6) organizations; (ii) adding a new excessive benefit tax on the organization, equal to 10% of the excess benefit, if certain minimum due diligence standards were not followed; (iii) removing the professional advice safe harbor (managers who approved such excess benefit transaction were protected if they relied on professional advice); and, (iv) removing the “rebuttable presumption of reasonableness”, which provides a presumption that a transaction is not excessive if certain procedures or steps were taken by the organization.
Penalties. The proposal will double current fines relating to failures to file returns and failure to make returns available for public inspection. Additionally, a 5% penalty may be imposed on managers for an underpayment of income tax due to a manager’s understatement of income.
A number of other changes are included in the Tax Reform Act of 2014. We urge all nonprofit organizations to take a look at the proposal and make sure you are aware of the potential changes. Furthermore this is your time to voice your concerns over the proposed changes.