As federal tax reform efforts proceed rapidly in both chambers of Congress, tax-exempt hospitals and other tax-exempt healthcare organizations are facing major potential changes. New tax burdens on tax-exempt organizations are among the ways in which the bills would raise revenue to pay for proposed tax cuts for businesses and individuals. Importantly, it is still early in the legislative process, and much may change as Republicans race to have a bill signed into law before the end of the year.
Major changes at stake. Most notably, current proposals include (1) repealing the long-standing exclusion of interest on 501(c)(3) bonds from taxable income – a sea change, which would eliminate critical low-cost financing for hospitals and other tax-exempt organizations, (2) imposing a new tax on tax-exempt organizations paying their executives compensation of over $1 million, and (3) imposing new risks on board members and tax-exempt organizations in determining executive compensation.
Current status of legislation. The House of Representatives is anticipated to vote this week on the bill passed by the House Ways and Means Committee on November 9, 2017, following release of the initial 429-page bill on November 2, 2017. The Senate Finance Committee has not yet released the text of its bill, but has provided a detailed summary here. A new mark-up of the bill is expected to be released soon after press time for this blog post. After both chambers pass a bill, the bills would need to be reconciled before proceeding to a final vote in both chambers. It is important to note that the draft legislation is evolving rapidly with changes occurring seemingly by the hour, including, most recently, the November 14th announcement by Senate Republicans of their intent to include the repeal of the Affordable Care Act’s individual mandate as part of tax reform.
Timing. The proposals below would generally take effect for tax years beginning after December 31, 2017.
The following is a more detailed summary of the proposed provisions of the current House and Senate bills that would most directly impact tax-exempt healthcare organizations. For more updates, subscribe to our Hospice Law blog.
Charitable Giving Incentives. Neither bill would eliminate the charitable contribution deduction, and certain proposed provisions would strengthen incentives for charitable giving (e.g., increasing the cap on deducting certain cash contributions). However, there is significant concern in the nonprofit sector that overall, the financial incentives for making charitable contributions would decrease materially under the current tax reform bills.
For example, both bills could decrease charitable giving by significantly reducing the number of people who can claim charitable contribution deductions, through reducing the number of individuals who would be eligible to itemize their deductions. Other provisions that could weaken charitable giving incentives include repealing, or limiting the application of, the estate tax. See the joint statement of the National Council of Nonprofits and the Council on Foundations opposing the House bill.
Combined with the proposed repeal of the exclusion of interest on qualified 501(c)(3) bonds from gross income, the anticipated reduction in charitable contributions are likely to exacerbate the financial stress that many tax-exempt hospitals and healthcare institutions are facing today.
Other Changes Impacting the Nonprofit Sector More Broadly. Other major changes impacting the nonprofit sector more broadly include proposals to:
- loosen the prohibition on Section 501(c)(3) tax-exempt organizations against supporting or opposing political candidates (the “Johnson Amendment”),
- repeal tax-exempt status for professional sports leagues,
- add a new tax on certain larger college and university endowments, and
- streamline the tax on private foundations’ net investment income to a flat 1.4% tax.