Tax policy has been on my mind lately – not because we just reviewed and filed our Form 990, but for another reason.
As many as 400,000 nonprofits could lose their tax exempt status on May 15 if they have not filed taxes returns or e-postcards for the last three years, as required by the Pension Protection Act of 2006. While the IRS went to great lengths to alert organizations to this impending deadline, thousands of nonprofits with annual revenues of less than $25,000 may find themselves without their tax exemption and not eligible to receive tax deductable donations.
Why did lawmakers include this provision? Because our government does not know how many 501(c)(3)s exist. Many organizations are certified, but since those with annual receipts of less than $25,000 were not previously required to file tax returns, no one knows if they have continued to do their work or have simply closed the doors.
Independent Sector had pressed Congress to give the IRS the latitude to suspend rather then revoke 501(c)(3) for two reasons: we believe the cost of re-certifying is a burden and we were concerned that organizations that do not follow the legislative process or sector news would be unaware of the requirement. But we did not prevail, and so here we are! There is still time to alert nonprofits to this impending requirement, so we encourage you to let your networks know about it.
Tax policy has been on my mind for another reason. I participated in two programs on this topic that included IRS leadership and key staff on Capitol Hill that raised three key issues.
Number One: Tax Treatment That Favors Certain Organizations
On April 14 – the day before individuals had to file – former congressional Joint Tax Committee staffer Roger Collinveaux invited a group of panelists to consider whether some causes deserve more favorable tax treatment than others and whether lawmakers ought to steer giving in a certain direction – particularly in light of the recession.
Some national and state elected officials have argued that insufficient tax-exempt dollars have made their way to vulnerable populations at a time when they need help the most. The examples below are just two of many that show why lawmakers moving policy in this direction might find it difficult to decide which programs qualify:
o A symphony whose musicians play Brahms one night and teach special-needs children another?
o The Ivy League university studying anti-pollution measures that could make the air in poor neighborhoods safer to breathe?
And how might lawmakers respond to those who argue that improving lives for an entire community also benefits its poorest, most needy members? Finally, there’s the issue of who should decide which causes warrant special treatment – a thorny question indeed.
Number Two: Preserving the Federal Estate Tax
Taxing property when it transfers upon death is literally an ancient concept. Roman Emperor Cesar Augustus imposed such a tax nearly 2,000 years ago. About the time of our nation’s founding, many governments in Europe and around the world were doing so as well. In 1916, the US Congress enacted the federal income tax that eventually gave rise to a form of the estate tax as we know it today. Lawmakers have thus used tax policy for almost 95 years to encourage its citizens, particularly those of great wealth, to give back to their communities or causes of their choosing.
And indeed, it’s worked! For returns filed in 2008, the estate tax generated $28.4 billion in charitable contributions claimed as deductions -- about the GDP of Lebanon or Costa Rica. But because Congress has not extended the estate tax this year, the sector stands to lose about 9% of total giving.
It is not clear yet what will happen with the estate tax. President Obama’s 2011 budget request proposes permanently extending it at 2009 levels ($3.5 million exemption per individual; 45% tax rate), but with no adjustments for inflation. If Congress rejects his proposal and does nothing, next year the estate tax reverts to pre-2003 tax levels ($1 million exemption per individual; 55 percent tax rate).
Given the importance of this source of revenue to the charitable community, I hope that you will contact your senators now and ask them to extend permanently the estate tax at no less than 2009 levels. You can learn more at http://independentsector.org/estate_tax, where you’ll also get a peek of our newly minted website. Check it out!
Number Three: State and Local Government Exemptions
State and local governments have long recognized the valuable work the nonprofit community does and, have exempted them from some property and sales taxes. But such exemptions vary from state to state, city to city. In the face of massive state budget deficits, some lawmakers have begun to impose new fees and explore ways to eliminate nonprofit tax exemptions.
Last year, for example, the Allegheny County Commission of Pennsylvania voted unanimously to impose a property assessment on nonprofits. The proposal was ultimately vetoed, but several commissioners vowed to find other ways to extract money from nonprofits. Similar efforts were rebuffed in Minnesota and Wisconsin. Rhode Island nonprofits may lose their sales tax exemption. City officials in Honolulu, Baltimore, Boston and elsewhere are also taking a hard look at exemptions. We’ve posted quite a bit of material on this topic: http://independentsector.org/exemptions_at_risk.
Conclusion
This November, every seat in the House of Representatives and 36 Senate seats are on the line – not to mention 37 governors and many other state offices. This is an important time for us to get our issues on the table, and we need to do it as soon as possible. As tax-exempt organizations, it is important to be mindful of what activities are permissible. To help you understand your rights, I encourage you to review “do’s” and “don’ts” for nonprofits, listed at http://independentsector.org/uploads/Policy_PDFs/Election_rules_charities.pdf.
Now is the time to let the candidates know how the recession has affected your organization, what your priorities are, and what policies they should be supporting if elected in November.
Ours is a powerful collective voice. Americans are relying on our organizations to shape government policy in a way that improves the quality of life for people everywhere. So let’s get ready. Let’s get geared up. And let’s get involved.
