Nonprofit and Philanthropic Tax Issues in the United States Van Leer Institute and Tel Aviv University January 2016 Mark Sidel Doyle-Bascom Professor of Law and Public Affairs University of Wisconsin-Madison Consultant (Asia), International Center for Not-for-Profit Law (ICNL), Washington DC

Nonprofit Tax Issues in the United States Brief introduction (what I am and especially am not) The American context and the varieties of nonprofits Tax exempt organizations and the narrower range of organizations to which donations are tax deductible Rationales for tax exemption and tax deductions Tax exemption The federal and state contexts Federal (the 1023 process), then state generally

Nonprofit Tax Issues in the United States Tax exemption (continued) Types of organizations 501(c)(3) organizations: tax exempt and donations tax deductible Purposes must be limited to one or more of the exempt purposes listed in section 501(c)(3) of the Code: Charitable, educational, religious, scientific, literary, fostering national or international amateur sports competition, or preventing cruelty to children or animals, testing for public safety The organizing document must not give the organization the ability or permission to engage in activities that don’t further those exempt purposes Assets of the organization must be permanently dedicated to one or more 501(c)(3) exempt purposes

Nonprofit Tax Issues in the United States Tax exemption (continued) 501(c)(3) tax exempt and donations tax deductible Operational test: Principal activities further exempt purposes Insubstantial number of activities that do not advance exempt purposes No political campaigns Restrictions on lobbying activities (insubstantial) Ensure that its earnings do not inure to the benefit of any individual shareholding or individual Must not operate for benefit of private interests (i.e. founder/family) Must not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose Must not have purposes or activities that are illegal or violate fundamental public policy

Nonprofit Tax issues in the United States Tax exemption (continued) Types of organizations Other 501(c) types, all tax exempt, many donations not tax deductible or specific conditions Examples: Civic leagues/social welfare organizations: 501(c)(4), TE but generally not TD (but may be business expenses) Labor, agricultural and horticultural organizations: 501(c)(5), TE, donations generally not TD Business leagues/chambers of commerce: 501(c)(6), TE, donations generally not TD Social and recreational clubs: 501(c)(7), TE, donations generally not TD

Nonprofit Tax Issues in the United States Tax exemption (continued) Public charities and foundations Public charity eligibility More restrictions on private foundations than on public charities Annual payout requirement; interlocking ownership/limits on holdings in business enterprises (excess business holdings); restrictions on self-dealing between PFs and their substantial contributors and other DPs; investments may not jeopardize carrying out exempt purposes; provisions to insure that expenditures further exempt purposes) Issues with the federal 1023 application process Issues in the states Business income issues at state and federal levels

Nonprofit Tax Issues in the United States Tax deductibility of donations Federal tax, federal law, and based on types of organizations donated to Generally, deduction limit of 50% of AGI But 20%/30% limits and the complications abound Generally, FMV rules on non-cash donations The VAT debate in the US

Nonprofit Tax Issues in the United States How things look from the ground in the US (at least, my ground) – a highly selected list Federal 1023 simplification issues and problems that arise Property tax exemption issues State tax complications and compliance Continued headaches over business activities (everywhere)

Nonprofit Tax Issues in the United States Foreign funding issues (in so many countries) The menu of options: Ban Tax Regulate donees and/or donors Treat as local organizations Foreign exchange regulations Sanctions regulation No regulation Other options?