Given the upcoming election, policy work on Capitol Hill may be slower this year, but there’s plenty of action at the Treasury Department and in the presidential campaigns that are making headlines targeting philanthropy and the charitable deduction.
So a little bit of context: At the end of last year, the sector had two big wins. First, we reined in the private foundation excise tax. In practical terms, the changes should allow private foundations to focus their time and resources on grantmaking to critical programs throughout communities, which is certainly something to be celebrated.
We also reversed a big ticket item from the 2017 tax bill, the unrelated business income tax (UBIT) on employees’ parking and transportation benefits. I’ve been working in tax nearly 30 years, and I can’t remember the last time a new tax was passed and then almost immediately panned by those who supported it.
How did this happen? Our community – grantees and donors – worked together to make the case with one voice. That’s how you pass legislation.
So, will more continued collaboration translate into notching some legislative wins in 2020? Conventional wisdom says no. It’s a presidential election year, which means it’s all politics all the time. However, there are some sizable mistakes in the 2017 bill that are still hanging out there, which lawmakers could address over the next few months. If these big mistakes prompt a bill early this year, two issues of ours could get some attention:
- Reversing the whittling away of the charitable deduction. This isn’t going to come cheap, so a reversal is not likely to move this year. However, progress ought to be made educating members of congress on the impact it’s having on the sector.
- Reversing the new tax on private foundations and associated businesses for compensation paid to their key employees and officers.
Then there’s all the expected action at the Treasury Department. It was recently reported that they’re making a big push to provide rules implementing the 2017 law, and topping their list is a set of rules explaining how to apply the new 21 percent tax on certain executives’ compensation.
Here’s an example highlighting the problem for foundations:
Lucy is the president of Lucy, LLC, which helps to fund Lucy Family Foundation. Lucy is also the president of the foundation and receives token compensation. Treasury guidance under Notice 2019-09 would levy a 21 percent tax on the amount of her combined salary over $1 million, and the foundation and Lucy, LLC, would owe a pro-rata share of the tax.
The moral of the story is that if you’re an executive at a private business and you’re generous, you pay a tax. If you’re not so generous, no tax. So, rules on this tax will become very important if Congress doesn’t reverse the new tax, as noted above.
Finally, but not the least of all by any means, are the proposals put forth by some presidential candidates. Former Vice President Joe Biden is floating a cap on the charitable deduction similar to President Obama’s proposal beginning around 2009. This is a place our community can put heads together on and win. As you may recall, we defeated Obama’s misguided proposal back in the day, and we ought to have an easier time this go ‘round given the current lackluster charitable giving numbers coupled with the steady drop in the number of givers.
And then there’s Senators Bernie Sanders and Elizabeth Warren, along with businessman Tom Steyer, all calling for a wealth tax, which some economists suggest could include a new tax on charitable dollars in foundations and donor-advised funds.
I’ll have more to say on this proposal, but for now here’s this: It sounds like under their view, accumulation of wealth is bad. So if donors voluntarily give their wealth away to charity, shouldn’t that be good?