New Law Requires Oregon Nonprofits to Satisfy Program Expenditure Test to Receive Deductible Charitable Contributions

by Davis Wright Tremaine LLP
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Many Oregon nonprofit organizations will soon face an additional hurdle to receiving contributions that are deductible as charitable contributions for purposes of Oregon’s income or corporate excise tax.

A new law authorizes Oregon’s attorney general to disqualify a Section 501(c)(3) organization domiciled or operating in the state of Oregon from receiving donations that are deductible for Oregon tax purposes if the organization fails to spend at least 30 percent of its functional expenses on program services. The calculation will be based on the average of the organization’s program service expenditures and total functional expenses over the most recent three fiscal years. The new law will become effective three months after the close of the current legislative session.

If a charitable organization’s program services falls below the required 30 percent, the attorney general may nevertheless decline to issue a disqualification order if the organization demonstrates that 1) it made payments to affiliates that should be considered in calculating the amount spent on program services, 2) it is accumulating revenue for a specific program that is consistent with its representation in solicitations, or 3) there are other mitigating circumstances. The attorney general must provide an organization with notice prior to disqualifying it, and the charitable organization will have 60 days to request a hearing to contest the action. 

The new disqualification rule does not extend to all charitable organizations. The attorney general does not have authority to disqualify private foundations, community trusts or foundations, charitable remainder trusts, Section 501(c)(3) organizations that aren’t required to file annual returns with the IRS (such as churches), an organization that is not required to file annual reports with the attorney general, and organizations that receive less than 50 percent of their support from grants and contributions or have been in existence for less than four years.

Once the attorney general disqualifies an organization, it will remain disqualified for at least one year. The disqualification will continue until the organization demonstrates that its program service expenditures meet the required percentage. During the period that the organization is disqualified, it must disclose that contributions to it are not deductible for Oregon tax purposes in any donor solicitation or acknowledgment. In addition, the organization cannot claim an Oregon property tax exemption as a charitable organization for the property tax year following the year in which the organization is disqualified, or any later year during which it remains disqualified.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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