Charitable Giving and Reform Proposals Snag Donor-Advised Funds, Compensation

Looks like it’s about that time again—several proposals around charitable giving and charitable reform have surfaced, and at least one of them has caught the charitable community off guard.

The House Proposal. This tax plan, released last week by Rep. Dave Camp, proposes the following:

  • Levying a 25 percent surtax on executive compensation for each of a nonprofit’s five highest employees when their individual compensation exceeds $1 million.
  • Requiring money deposited in donor-advised funds to be paid out to a charity within five years. It would subject the sponsoring organization  maintains legal control over the donor-advised funds to a 20 percent excise tax on money remaining in an account after five years.
  • Levying a 1 percent excise tax on investment income of private colleges and universities with assets greater than $100,000 per enrolled student.
  • Require all nonprofits to file their Form 990 electronically.
  • Limiting the charitable deduction to the amount given to charity that exceeds 2 percent of their adjusted gross income.

Donor-Advised Fund Issue. Community foundations, which often are the sponsoring organizations for donor-advised funds, were clearly not expecting the proposed payout requirement, as indicated in this Chronicle of Philanthropy article.

“I was really surprised,” said Jeff Hamond, a vice president at Van Scoyoc, a Washington lobbying firm, who represents community foundations. “No one had ever mentioned this was under consideration, and I’m not aware of any member [of Congress] who is pushing it.”

Under current law, donors can contribute to a donor-advised and get a current tax deduction, while then being able to make non-binding recommendations for grants to charity over time. There are no current tax rules around requiring the money to be paid out within any timeframe, though the possibility of requiring a certain percentage to be paid out annually (similar to the requirement for private foundations) has been floated before. Proponents think that a payout requirement would inject more money into charities that are conducting activities, rather than serving as fee generators for the sponsoring organization. Opponents of a payout requirement argue that the donor-advised fund, as is, leads to increased giving over time, and that cracking down could steer more money into private foundations.

With the Pension Protection Act of 2006, a major piece of reform legislation that introduced many new requirements for donor-advised funds, Congress directed Treasury to craft regulations on how donor-advised funds are administered. The IRS has since studied certain issues, including a potential payout, and released a report in 2011  that indicated that the average spending rates of donor-advised funds were fairly high. And although it is now almost eight years past the passage of the PPA, no regulations have been issued—and some think this is due to pressure from sponsoring organizations that benefit so greatly from the fees the earn for overseeing the funds. According to an estimate by the National Philanthropic Trust, more than $45 billion is currently held in donor-advised funds.

President Obama’s Proposal.   The president’s plan around charitable, released earlier this week, is familiar—he is proposing to cap all deductions at 28 percent. This would limit the value of deductions, including charitable deductions, for taxpayers in higher tax brackets. We’ve blogged previously about similar proposals, and charities continue to oppose this action for fear it will reduce the amounts that individuals are willing to give.

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