Federal Tax Law Changes Affecting 501(c)(3) Nonprofits David Heinen North Carolina Center for Nonprofits
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Tax Cuts and Jobs Act North Carolina Center for Nonprofits
Main priorities for tax reform North Carolina Center for Nonprofits
Employees tax withholdings North Carolina Center for Nonprofits
Withholding income tax Reduction in individual income tax rates + Increase in standard deduction = Lower taxes on many employees income Translation: Nonprofits may need to adjust the amount they withhold from employees paychecks for taxes
Withholding income tax How are my taxes going to change in 2018? https://apps.irs.gov/app/withholdingcalculator/
Unrelated business income tax changes North Carolina Center for Nonprofits
Unrelated business income tax What is UBIT? 1. Trade or business 2. Regularly carried on by a nonprofit 3. Unrelated to a nonprofit s mission
Unrelated business income tax Lower corporate income tax rate (21%) applies to UBIT Flat income tax rate means increase in effective tax rate of UBIT for nonprofits with less than $90,385 in taxable income
Siloing of UBIT General principle nonprofits pay UBIT on the net income from their unrelated business activities New IRC Section 512(a)(6) Nonprofits must calculate net UBIT for each separate trade or business Concerns are undefined terms and the siloing of expenses into each unrelated business activity
Siloing of UBIT Recent IRS Notice No formal regulations yet, but IRS suggests nonprofits use a reasonable, goodfaith approach to determine separate trades or businesses IRS suggests 6-digit NAICS codes are a good starting point Advertising revenue could be grouped together Rental income would be treated separately Income from partnership interests may be able to be treated as a single trade or business if certain tests are met
New taxes on nonprofits! New tax in 2018 IRS Section 512(a)(7) 21% unrelated business income tax penalty on the amount nonprofits pay for: 1. Transit passes 2. Qualified parking expenses
UBIT on fringe benefits Unanswered questions/concerns An income tax on a nonprofits expenses? New tax liability and filing requirements for some nonprofits Will nonprofits that own parking lots be treated differently? What if parking is included in lease?
UBIT on fringe benefits Note on state taxes NC has decoupled from this provision This means that nonprofits that pay for employees parking and transportation benefits don t need to include these expenses as UBIT for NC corporate income tax purposes
Other TCJA provisions affecting nonprofits
More new taxes on nonprofits! 21% excise tax on nonprofits with compensation of $1 million or more for five highest-paid staff 1.4% excise tax on net investment income of nonprofit higher education institutions Potential for setting precedent of taxing nonprofits
Estate tax Why this matters for nonprofits Changes in the tax plan Doubles the exemption to about $22 million for couples, starting in 2018 Does not repeal the estate tax
ACA individual mandate Repeals the ACA individual mandate in 2019 Possible ramifications for nonprofits as employers and service providers
Impact of TCJA on charitable giving North Carolina Center for Nonprofits
House Ways & Means Committee Continues the deduction for charitable contributions so people can continue to donate to their local church, charity, or community organization.
Senate Finance Committee Preserves the deduction for charitable contributions, continuing the long recognition of the importance of private philanthropy for the churches and community organizations that daily provide aid and assistance to those in need.
So why are nonprofits concerned?
Doubling the standard deduction Last year, about 31% of taxpayers took advantage of the charitable deduction by itemizing With higher standard deduction, many fewer taxpayers will itemize
Doubling the standard deduction Official estimate about $95 billion per year reduction in deductible charitable contributions This translates to a $13-$26 billion reduction in charitable contributions per year
Who won t be itemizing? North Carolina Center for Nonprofits
What does this mean for donors? For many, the cost of giving is higher Example: a middle-class taxpayer in the 22% tax bracket Cost of $3,000 donation in 2017 = $2,340 Cost of $3,000 donation in 2018 = $3,000
Does this mean taxpayers will give less? It depends!
Which nonprofits are going to lose out? It s impossible to know for certain... But many donors will probably give less to nonprofits with which they have less of a personal connection
Implications for fundraising approaches Less emphasis on transactional fundraising More emphasis on relationships with donors Have a better sense of why donors are giving to your nonprofit and personalize the message even more
Implications for fundraising approaches Some donors may bunch contributions in one year to maximize tax benefit of charitable contributions This may make donor advised funds more attractive
Implications for donor options For most donors, there will be no tax advantage for giving to a 501(c)(3) nonprofit More competition for funding from: 501(c)(4)s Political parties Individual political campaigns PACs
Provisions not in the final version of TCJA North Carolina Center for Nonprofits
Universal charitable deduction North Carolina Center for Nonprofits
A (long shot) solution for charitable giving Universal, non-itemizer deduction for charitable giving Legislation H.R. 3988 / S.2123 Congressman Mark Walker (R-NC) is the primary sponsor Above-the-line deduction capped at 1/3 of standard deduction
Universal, non-itemizer deduction Rationale Preserve existing charitable giving Expand charitable giving among low- and middleincome taxpayers Pushback (i.e. why it wasn t in the tax plan) What are the costs/tradeoffs of adding this new tax benefit for charitable giving?
Nonprofit nonpartisanship (a.k.a. the Johnson Amendment)
Johnson Amendment Provision in Section 501(c)(3) Charitable nonprofits, foundations, and churches can t: Support or oppose candidates for office Make campaign contributions Coordinate activities with political campaigns
Johnson Amendment Why is it called the Johnson Amendment?
Legislative proposals Repeal the Johnson Amendment Allow endorsements and de minimis political spending Prevent IRS from enforcing Johnson Amendment
Johnson Amendment Why repeal or weakening isn t needed Churches and nonprofits can advocate and speak out on a wide range of policy issues Individuals associated with churches and nonprofits can endorse candidates, make campaign contributions, and run for office
Why keeping partisan politics away from nonprofits is best for everyone It protects the public s trust in nonprofits It ensures that tax-deductible contributions go to mission-related work, not to partisan politics It prevents politicians from pressuring nonprofits It prevents funders from pressuring nonprofits It keeps nonprofits focused on their missions!
Prospects in the future Congress likely to pass appropriations bill by December 7 that could prevent IRS from enforcing Johnson Amendment against churches No legislative action likely in 2019-2020
Other nonprofit provisions removed from final version of TCJA
Intermediate sanctions Tax penalty on disqualified persons when there is an excess benefit transaction Senate version of TCJA Extend penalties to the organization in some circumstances Replace rebuttable presumption with due diligence procedures Allow penalties even if board relies on professional advice
Earlier versions of TCJA Other UBIT changes Income from licensing nonprofit s name or logo would be UBIT Research exemption would be limited to research made freely available to public
Private foundation excise tax Earlier versions of TCJA Streamlined 1.4% tax, which is between the current rates of 2% and 1% This would have been an overall tax increase on foundations
Earlier versions of TCJA Donor advised funds Would have added disclosure requirements Other proposals Payout requirements (5 or 10 years) Expansion of IRA charitable rollover to DAFs
Never included in TCJA E-filing of 990s Separate legislation moving through Congress
Private activity bonds House version of TCJA would have eliminated taxexempt private activity bonds Some 501(c)(3)s use these to finance building and renovation projects
Volunteer mileage rate Current law: Fixed in statute at 14 cents/mile House version of TCJA: Would have adjusted for inflation
IRS Rulemaking North Carolina Center for Nonprofits
Proposed regulations on state tax credits TCJA included $10,000 cap on SALT deduction Three states created SALT workarounds IRS regulations on state tax credits Responsive to SALT workaround statutes Broadly excludes amounts eligible for state tax credits from federal tax deductibility as charitable contribution Potential future implications in North Carolina