4/13/14 — Nonprofits urge caution in changes to federal tax laws
By Jane C. Simons
Leaders in the nonprofit community are closely monitoring a movement at the federal level to reform the current tax policies.
That’s because the impact of those reforms could affect charitable deductions and the ways individuals donate to the nonprofit sector.
At the federal level there are two major issues surrounded by a lot of little issues, said Robert S. Collier, president and chief executive officer of the Michigan Council of Foundations.
“The (Internal Revenue Service) has been having quite a battle with Congress over the issue of their denying tax-exempt status or postponing that for 501(c)(4) applicants, and as a result of that whole controversy, there have been new regulations proposed by the IRS that would result in more regulations of 501(c)(4) (organizations) and public charities that are 501(c)(4)s,” Collier said.
The IRS received more than 69,000 comments on its proposed new regulations for 501(c)(4) groups, which it defines as a nonprofit social welfare organization or an employee association.
The volume of reaction was vastly more than the IRS anticipated, said Collier, who noted the IRS is now reading through those comments.
He doesn’t expect any changes for at least one year.
Tinkering with the charitable deduction
Of major concern are changes that could be made to the charitable deduction that has been a mainstay of United States tax policy for almost 100 years.
Diana R. Sieger, president of the Grand Rapids Community Foundation, said she doesn’t think the proposed changes to the charitable deduction are widely known.
“There’s some concern about what kind of an impact that would have,” Sieger said. “If the federal government is going to continue to lean on the social sector as a safety net, then why tie our hands in trying to limit what donors may give to us?
“I’m not saying that the only impetus for giving is that people are going to get a tax deduction, but that is a motivator. If that deduction is eroded, it will have an impact on what people will be giving to charitable organizations.”
The Michigan Council of Foundations’ Collier said he does not think people understand the positive impact that nonprofits have on a local, state and national level. The key message from the foundation community to lawmakers is to leave the charitable tax deduction alone because government is asking the nonprofit sector to pick up where they’re cutting back, he said.
“We have pointed out to them that we cannot replace the role of government, but we can be a strong partner,” said Collier, who suspects what’s really driving the proposed reforms is a president and a Congress who are anxious to balance the budget and, as such, “tax deductions have been put into play.”
Nonprofits feel more scrutiny
But proposed changes to the charitable deduction aren’t the only issues nonprofits face. There also is increased governmental scrutiny of nonprofits as a whole, Sieger said. Whether or not it’s a nonprofit or a for-profit, a business needs to acknowledge that oversight, transparency and accountability are all extremely important, she said.
“I don’t think anyone in the nonprofit sector has a problem with that,” Sieger said. “There is a reason for that scrutiny and that is to make sure that any organization deemed a 501(c)(3) does indeed have that status and is worthy of being able to provide donors who want to donate to a specific cause with assistance in making those charitable gifts.”
Collier said he thinks there are a number of good things in the tax package that’s been proposed.
“But there are some issues of concern and one of those is that we must be diligent and get data and stories together,” Collier said.
In some cases, the IRS is stepping up and telling particular 501(c)(3) organizations that they no longer qualify for that designation. The 144,000-member McLaren Health Plan in Flint faces the loss of its 501(c)(3) status after receiving notice from the IRS last month, according to a report last week in Crain’s Detroit Business. If the HMO’s status is revoked, it would likely refile as a 501(c)(4), McLaren’s lawyer said.
The difference between the two classifications is that a 501(c)(3) can extend federal and state tax deductions for charitable donations, but they cannot engage in political activities, while a 501(c)(4) can, Crain’s reported.
If the IRS moves ahead with the revocation, it wouldn’t be the first instance of a nonprofit HMO in the state losing its 501(c)(3) status. Health Alliance Plan, for example, lost its 501(c)(3) status in 2004, but later became a 501(c)(4), according to the report.
Period of adjustment
This period of scrutiny is not new to the nonprofit sector, Sieger said. It actually began in the 1990s with donor-advised funds.
“It really got the attention of federal government in the early 1990s because all of the major investment houses created charitable gift funds. Those funds are legally nonprofits and donors can receive tax deductions,” Sieger said. “That really piqued the attention of Congress, and it has waxed and waned over the course of the last 20 years.”
The reality, she said, is that the nation’s community foundations have been providing donor-advised funds for years.
“In the world of community foundations, we have to prove that our money comes from a variety of sources,” Sieger said. “We honor and respect the need to prove that we don’t have control over it but that we are working with donors to make sure the funds go where they want them to go. What we’re seeing now is the difficulty some Congressional staff have with what it means to hold an endowment.”