Senate Bill Would Give Small Charities a Tax Credit to Offer Health Insurance

Small charities would receive a tax credit to help them provide health insurance to their employees, under a bill that the Senate Finance Committee was working on last week.

Two other proposed provisions related to nonprofit work were not included in the measure under consideration: a move to limit the tax break for charitable donations for some wealthier donors to pay for health-care changes, and a measure to alter how nonprofit groups justify their pay levels.

The tax credit — proposed after nonprofit leaders complained that they were not covered by original language calling for a small-business income-tax credit — would allow eligible charities to reduce their payments for some payroll taxes.

Those include the payments they make to cover income taxes and Medicare taxes withheld from employee paychecks and the Medicare taxes they pay as employers. The credit would be available to employers with no more than 25 full-time-equivalent employees with annual wages averaging no more than $40,000.

The legislation sets out a complicated formula for determining the amount of the credit, using factors like the percentage of the insurance premiums paid by the employer and the average cost of premiums for small businesses in the employer’s state.

Proposals Considered

A handful of senators proposed limiting the tax break for itemized deductions, including gifts to charity, to 35 percent of the dollars spent as a way to raise money to overhaul the health-care system — instead of letting it rise to 39.6 percent when the top tax bracket increases to that amount under White House proposals. But those provisions were dropped while the committee members worked on the measure. The president has proposed a more drastic cap of 28 percent for couples earning more than $250,000 (individuals $200,000) starting in 2011. A coalition of 14 nonprofit leaders — from groups including the American Association of Museums, the Association of Fundraising Professionals, the Council on Foundations, Operation Smile, and United Jewish Communities — sent a letter to Sen. Max Baucus, the Montana Democrat who chairs the Finance Committee, opposing the amendments, saying they would create a disincentive for charity’s biggest donors during a “tough charitable giving environment.”

A measure related to nonprofit pay also was left out of the bill.

Sen. Charles E. Grassley had sought an amendment that he said would rein in charities that set overly high compensation for officials. His proposal would have eliminated a “safe harbor” provision in IRS rules that allows executive compensation to be deemed reasonable if charities follow certain steps.

Mr. Grassley also sought an amendment to the bill to clarify that the IRS has the right to ask about governance and management practices on the Form 990 informational tax return.

Though he withdrew his amendments before the bill was passed by the committee, an aide to the senator said Mr. Grassley reserves the right to propose them again later, either as part of the health-care bill or to another piece of legislation.