Author: Ginny Belcher, CPA | Not-for-Profit Tax Senior Manager
In February 2014, the House of Representatives Ways and Means Committee released “The Tax Reform Act of 2014,” a tax reform package that included a number of potential changes to tax exempt organizations. These changes could result in significant new tax liabilities on not-for-profits. Although they do not expect to vote on these changes this year, many of these proposed changes could find their way into future legislation, which could change the tax obligations of not-for-profits.
The proposed changes not only impact tax exempt organizations but also contributors to exempt organizations. These changes relate to Unrelated Business Income Tax, Excise Taxes and Intermediate Sanctions, the tax exempt status of organizations, penalties, and the individual charitable contribution floor.
Detailed information is available from the Joint Committee on Taxation’s technical explanation on all of the proposed changes. However, the following is a summary of the provisions related to Unrelated Business Income Tax (UBIT).
Currently, royalties received from the licensing of a not-for-profit’s name and logo are exempt function income. However, under the proposed legislation, income from the licensing of the organization’s name and logo would be subject to UBIT.
Corporate sponsorship payments are also exempt for tax as long as the benefits the sponsors receive are limited to use or acknowledgment by the not-for-profit of, and reference to, the sponsor’s name, logo, product lines, and other similar items. However, the proposed legislation would eliminate “product lines” from the tax-exempt benefits. It would also restrict how a sponsor’s name is used or acknowledged when the exempt organization receives more than $25,000 for the sponsorship of a single event. This provision seems to be focused on sponsorships offered for college football bowl games and in effect could eliminate the assignment of naming rights for games or possibly taxing the income received from the sale of the naming rights.
There is another provision that would require UBIT to be calculated separately for each activity that is subject to tax. Losses from one activity could no longer offset gains/income from other activities.
Additionally, there are several other items related to unrelated business income in the proposed legislation:
- Eliminates the exclusion of gains and losses from the disposition or real property acquired from financial institutions or receiverships, which currently allows charitable organizations that own certain real property from paying taxes on the gains from the sale
- Only allows the exclusion for research income where the research results are made available to the general public
- Modifies the charitable deduction percentage limit for certain charitable trusts when calculating UBIT
- Increases the specific deduction from $1,000 to $10,000 against unrelated business taxable income
The many provisions of the proposed legislation will most likely be debated throughout the year but it is doubtful that they will be voted on in 2014. However, it is important that tax exempt organizations and charities remain focused on the process and understand the possible ramifications of the bill’s many provisions.
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