The U.S. House of Representatives’ Ways and Means Committee released its budget reconciliation bill and its everything nonprofit leaders feared. It includes everything from granting the U.S. Secretary of the Treasury unilateral authority to revoke the 501(c)(3) tax-exempt status of nonprofits, to taxing foundation endowments, to adding back in a deduction for non-itemizers but at half of what it was prior to it expiring in 2022.
House Ways & Means Committee is scheduled to meet today for the full mark-up of the bill. The plan is to get it passed and over to the U.S. Senate by Memorial Day. The goal is to have it on the President’s desk by July 4. Here’s a link to the bill.
Reaction in the sector was swift. “The Nonprofit Alliance (TNPA) acknowledges the mixed impact of the House’s draft legislation on the nonprofit sector. We strongly support the proposed above-the-line charitable deduction for non-itemizers,” said Shannon McCracken, CEO, of the Nonprofit Alliance.
She said she is “deeply concerned” about several provisions that could harm nonprofit operations and philanthropic capacity. “The incorporation of provisions from last year’s Nonprofit Security and Anti-Terrorism Bill (HR 9495) raises serious concerns for us and our members, many of which were part of the strong sector-wide opposition to measures that could undermine nonprofit independence,” according to McCracken.
Additionally, she explained that the proposed progressive excise tax structure for private foundations could significantly reduce grantmaking capacity, particularly from larger foundations that support critical community needs, and potential expansions of Unrelated Business Income Tax (UBIT) could expose more nonprofit revenue to taxation, threatening financial sustainability.
“TNPA will continue working with lawmakers to strengthen positive provisions while addressing these concerning elements. We urge policymakers to consider nonprofits’ vital role in our communities when finalizing this legislation,” she said.
Diane Yentel, CEO of the National Council of Nonprofits, condemned harmful elements of the bill. “This tax bill introduced by House Republicans is a direct assault on organizations that serve the most vulnerable Americans, stepping in to provide support in overlooked communities. Families that rely on church food pantries, veterans that depend on nonprofits for mental health services, moms and babies that receive low-cost health care, and domestic violence survivors living in shelters are all harmed when Congress denigrates nonprofits and makes their work more difficult to do,” she said via a statement.
The statement continued: “The bill hands unchecked power to (U.S. Treasury) Secretary (Scott) Bessent to punish organizations that do not fall in line with the administration’s ideology, by labeling them as terrorist-supporting groups without due process, without a third-party investigation and without public evidence — all while concealing details under the pretext of national security.”
She did applaud the inclusion of the Universal Charitable Deduction. “However, the benefits of this provision are far outweighed by the many damaging aspects of the bill,” according to Yentel.
College and universities, most notably Harvard University and Columbia University, have been targeted by the Trump Administration including cancelling grants and referring to the schools’ endowments. If this element of the reconciliation bill is included in the final version, private endowments taxes will be 1.39% on foundations with $50 million or less, 2.78% for endowments of between $50 million and $250 million, 5% for endowments of $250 million and less than $5 billion, and 10% on endowments of $5 billion and more.
According to language in the draft: “The assets of any private foundation shall be determined with respect to any taxable year as being the aggregate fair market value of all assets of such private foundation, as determined as of the close of such taxable year. The preceding sentence shall be applied without reduction for any liabilities.”
Also proposed is an excise tax based on investment income of private colleges and universities that is tied to the number of students.
- 4% in the case of an institution with a student adjusted endowment in excess of $500,000, and not in excess of $750,000;
- 7% in the case of an institution with a student adjusted endowment in excess of $750,000, and not in excess of $1.25 million;
- 14% in the case of an institution with a student adjusted endowment in excess of $1.25 million, and not in excess of $2 million, and;
- 21% in the case of an institution with a student adjusted endowment in excess of $2 million.
When it comes to pulling a nonprofit’s exempt status, the bill inserts language from H.R. 9495, which was introduced last year and refers to the previously introduced bill. “This fact sheet addresses stakeholders’ concerns with the bill’s provisions related to terminating nonprofits’ tax-exempt status,” according to language written into the bill.
Specifically, it would:
- Grant the Treasury Secretary unilateral authority to revoke the 501(c)(3) tax-exempt status of nonprofits determined by the Treasury Department to provide “material support or resources” in support of terrorism.
- Nonprofits designated as a “terrorist supporting organization” then have 90 days to “cure” the designation by either demonstrating “to the satisfaction of the Secretary” that they did not, in fact, provide such support or resources or made a reasonable attempt to have that support and resources returned to their organization.
- If the Secretary rejects a nonprofit’s attempt to “cure,” the nonprofit can then appeal for a Treasury Department administrative review and then to federal court.
There is no language on how a nonprofit would be considered a terror supporting organization. Leaders at international aid organizations, already damaged by the near shutdown of the United States Agency for International Development (USAID), fear that any aid to areas seen as unfriendly to the administration would be labeled as such.
A statement from the Council on Foundations and Independent Sector voiced strong opposition to a lack of due process in the bill, explaining that terror financing is already illegal. The organizations’ statement read: “Terror financing has no place in the charitable sector. It is illegal under the law and runs counter to the purposes of American civil society. If bad actors are exploiting our sector for illegal purposes, they need to be stopped for many reasons — including preserving the public’s trust.”
The statement continued: “However, our organizations strongly oppose language in Section 112209 of the Ways and Means Committee’s budget reconciliation legislation that – like H.R. 6408 and H.R. 9495 in the 118th Congress – has alarming potential for partisan abuse and chilling of charitable sector speech and activity.
“Allowing the Secretary of the Treasury to unilaterally designate section 501(c) nonprofits as “terrorist supporting organizations” while requiring those organizations to prove their innocence runs counter to constitutional due process. We appreciate that the authors include an appeals process, but this opportunity would be too little, too late for designated organizations. Those that appeal successfully would still face irreparable damage to their reputation with the people they serve, their donors, and the American public. As a result, we vigorously oppose the current language, and we will work to defeat it at every step of the legislative process.
“If terror-financing rules and regulations need improvement to protect public safety and the integrity of the charitable sector, we remain committed to collaborating with lawmakers.
When it comes to non-itemizers who take a deduction, the language in the bill restores half of what had expired in 2022, from $300 and $600 to $150 and $300.
The legislation would also create a 1% floor for charitable contributions made by corporations and allows the corporations to carry forward the tax benefit for five years and it extends excise tax on executive compensation for all employees earning $1 million or more.
