Unless otherwise stated, all provisions would be effective for tax years beginning after 2014.
Excise tax on excess tax-exempt organization executive compensation
A new provision would impose a 25% excise tax on compensation in excess of $1 million paid by a tax-exempt organization to any of its five highest paid employees for the tax year.
Clarification of UBIT treatment
Under the discussion draft proposals, the unrelated business income tax (UBIT) would apply to all organizations exempt under section 501(a)—even if an organization is also exempt or excludes amounts from gross income by reason of another provision.
For example, a state pension fund may have a ruling that it is exempt under section 501(a) and may also exclude its income from tax by reason of section 115(1). Under the proposal, the state pension fund would be subject to the unrelated business income tax.
Name and logo royalties treated as UBTI
The discussion draft proposes treating the sale or license of a tax-exempt organization’s name or logo (including any related trademark or copyright) as a per se unrelated trade or business and treating any royalty income as unrelated business taxable income (UBTI).
UBTI separately computed for each trade or business activity
Under the discussion draft, a tax-exempt organization would be required to calculate separate the net UBTI of each unrelated trade or business. Any loss derived from one unrelated trade or business could only be used to offset income from that unrelated trade or business, with any unused loss subject to the general rules for net operating losses (NOLs).
As proposed, any NOLs generated prior to 2015 could be carried forward to offset income from any unrelated trade or business, but NOLs generated after 2014 could be carried back only to offset income with respect to the unrelated trade or business from which the NOL arose.
Exclusion of research income limited to publicly available research
The discussion draft proposes limiting the exception from UBTI for fundamental research to income derived from research made available to the public.
Parity of charitable contribution limitation between trusts and corporations
Under the discussion draft, the charitable contribution deduction for purposes of determining unrelated UBTI would be limited to 10% of taxable income for both tax-exempt corporations and tax-exempt trusts.
Increased specific deduction for UBIT
The discussion draft proposes increasing the deduction against UBTI from $1,000 to $10,000.
Repeal of exclusion of gain or loss from disposition of distressed property
Under the discussion draft, the provision concerning an exclusion to UBTI for gains and losses from the sale of distressed property (i.e., certain real property acquired by the tax-exempt organization from a bank or savings and loan association that held the property in receivership or conservatorship or as a result of a foreclosure) would be repealed.
Qualified sponsorship payments
The discussion draft proposes two modifications to the exception from UBTI for qualified sponsorship payments.
- First, if the use or acknowledgement refers to any of the sponsor’s product lines, the payment would be treated as income from an advertising trade or business, a per se unrelated trade or business that is subject to UBTI.
- Second, if a tax-exempt organization receives more than $25,000 of qualified sponsorship payments for any one event, any use or acknowledgement of a sponsor’s name or logo could only appear with and, in substantially the same manner as, the names of a significant portion of the other donors to the event.
Under the discussion draft, the penalties on tax-exempt organizations and their managers for failures to file various returns, disclosures, or public documents would be increased, including the following:
|Organization’s failure to file information return
||Increase from $20 to $40 per day|
|Large organization’s (> $1 million gross receipts) failure to file information return
||Increase from $100 to $200 per day|
|Manager’s failure to comply
||Increase from $10 to $20 per day|
|Individual’s failure to comply with public inspection requirements
||Increase from $20 to $40 per day|
These provisions would be effective for information returns required to be filed on or after January 1, 2015.
Manager-level accuracy-related penalty on underpayment of UBIT
A new provision would impose a 5% penalty, not to exceed $20,000, on managers of a tax-exempt organization when an accuracy-related penalty is applied to the organization for any substantial understatement of UBIT. The new provision also would apply a 10% penalty, not to exceed $40,000, on managers of a tax-exempt organization for an understatement of UBIT relating to a reportable transaction or listed transaction.
Modification of intermediate sanctions
The discussion draft would expand the applicability of the intermediate sanctions excise tax from section 501(c)(3) public charities, section 501(c)(4), and section 501(c)(29) organizations to also include excess benefit transactions engaged in by section 501(c)(5) labor, agricultural, and horticultural organizations, and section 501(c)(6) business leagues, chambers of commerce, real estate boards, and boards of trade. It would also expand the definition of disqualified persons to include athletic coaches and investment advisors.
Also under the discussion draft, the provision would impose an excise tax of 10% on the tax-exempt organization when a tax is imposed on the disqualified person. However, such tax would not apply to a transaction when the organization could demonstrate that it met minimum standards of due diligence—i.e., by having the transaction approved in advance by an independent body of the organization that relied on comparability data and documented the basis for approving the transaction.
The provision also would preclude managers from being able to rely on the professional advice safe harbor under the Treasury regulations for purposes of avoiding the manager-level tax.
Modification of taxes on self-dealing
Under the discussion draft, private foundations would be subject to a 2.5% (10% for cases involving the payment of compensation) excise tax when the self-dealing tax is imposed on a disqualified person. Also, the provision would preclude managers from being able to rely on the professional advice safe harbor for purposes of avoiding the manager-level tax.
Excise tax on failure to distribute, within five years, contribution to donor advised fund
The discussion draft would require donor advised funds to distribute contributions to a public charity within five years of receipt. The failure to make such a distribution would subject the sponsoring organization of the donor advised fund to an annual excise tax equal to 20% of the undistributed funds. For contributions made before, and remaining in the donor advised fund on, January 1, 2015, the five-year distribution period would begin on January 1, 2015.
Simplification of excise tax on private foundation investment income
Under the discussion draft, the excise tax rate on net investment income would be reduced from 2% to 1%. The provision would also repeal the exception from the excise tax for exempt operating foundations.
Repeal of exception for private operation foundation failure to distribute income
The discussion draft would repeal the special exclusion from the minimum distribution requirement for private operating foundations. Therefore, private operating foundations generally would be subject to the excise tax for failure to distribute income, like non-operating private foundations.
Excise tax based on investment income of private colleges and universities
The discussion draft would impose a 1% excise tax on the net investment income of private colleges and universities with non-exempt use assets valued at the close of the preceding year of at least $100,000 per full-time student.
Other general provisions
The discussion draft also proposes other provisions that would affect exempt organizations, related to:
- Repealing the tax-exempt status for professional sports leagues
- Repealing the exemption for certain property and casualty insurance companies and CO-OP health insurance issuers
- Requiring workmen’s compensation insurance organizations to provide only insurance coverage required by state law in order to retain exempt status
- Repealing Type II and Type III supporting organizations
- Requiring section 501(c)(4) organizations to provide notice to the IRS of commencement of operations within 60 days of formation
- Expanding declaratory judgment relief to section 501(c)(4) organizations
- Limiting the Form 990, Schedule B (Schedule of Contributors) information for section 501(c)(4) organizations to contributions of $5,000 or more from the organization’s current or former officers, directors, or five highest compensated employees
- Requiring electronic filing of all Form 990-series forms
- Limiting the IRS and Treasury to the standards and definitions in effect on January 1, 2010 to determine whether an organization is operated exclusively for the promotion of social welfare for purposes of section 501(c)(4)
For more information, contact a tax professional with KPMG’s Washington National Tax:
Partner-in-Charge of KPMG's Washington National Tax Exempt Organizations Tax group