President Obama recently released his proposed budget for 2017, which contains several important tax changes for exempt organizations in key areas of fundraising and deductibility of donations, as well as some changes relating to taxation and administration.
Fundraising and Deductibility. In order to simplify the adjusted gross income (“AGI”) limitation for charitable deductions, the budget basically limits the deduction for all donations of property to 30 percent of AGI. Only cash donations to public charities and qualified conservation contributions will still be subject to the higher 50 percent limit. Also, the carryforward period for limited charitable deductions would be extended from the current five years to fifteen years. This would enable taxpayers who might otherwise not have run into the AGI limitation to use the portion of deduction that was limited further into the future. Sandra Swirski, executive director of the Alliance for Charitable Reform, was unhappy with the President’s proposed changes, saying they will “take resources away from charities.”
Private Foundation Excise Tax. The proposed budget also changes the current two-tiered system for the private foundation excise tax on net investment income under Section 4940. Currently, private foundations pay 2 percent on net investment income, but that is reduced to 1 percent for any year in which the foundation’s distributions for charitable purposes exceed the average level of the foundation’s charitable distributions over the preceding five tax years. Under the current rule, foundations must determine each year whether they are subject to the 1 percent or 2 percent tax, and increases in the foundation’s payout in any given year—such as an increase in grantmaking in order to help with a natural disaster—can make it more difficult for the foundation to qualify for the reduced one percent rate in subsequent years. Thus, the two-tier structure can make tax planning more difficult. The proposed budget would replace this current two-tier rate structure with a single 1.35 percent rate, which would add simplification but also would result in many of America’s largest foundations seeing an increase in their taxes.
Additional Funding for IRS. Finally, the proposed budget increases funding to the IRS by 9.3 percent, with the additional funding specifically targeted at improvements to taxpayer services and enforcement activities. “Although the 2016 Consolidated Appropriations Act reversed a five-year trend of irresponsible cuts to the IRS budget, which threatened the integrity of the tax system and resulted in unacceptable levels of taxpayer services – the IRS operating budget is still almost $1 billion below 2010 levels, even before accounting for inflation,” the budget proposal said. According to IRS Commissioner John Koskinen, only about 37 percent of taxpayer calls were answered by IRS employees during the 2015 filing season and of those calls that were answered, employees were only allowed to answer the most basic questions for taxpayers. The increased funding will help to replace some of the 18,000 employees the IRS has lost in recent years, which should hopefully improve taxpayer services.