EXEMPT ORGANIZATIONS ANALYSIS OF THE TAX CUTS AND JOBS ACT TAX REFORM S POTENTIAL ON NONPROFITS As of December 20, 2017 Impose an Excise Tax on Executive Compensation The conference bill proposes to impose a 21 percent excise tax on the compensation of any covered employee in excess of $1 million. The term covered employee means any employee (including any former employee) of an applicable tax exempt organization if the employee a) is one of the five highest compensated employees of the organization for the taxable year, or b) was a covered employee of the organization (or any predecessor) for any preceding taxable year beginning after December 31, 2016. The changes would apply to tax years beginning after 2017. Impose an Excise Tax on Nonprofit Colleges & Universities The conference bill proposes to impose a new excise tax of 1.4 percent on the net investment incomes of applicable educational institutions. The term applicable educational institution refers to an educational institution which a) had at least 500 students during the preceding taxable year; b) more than 50 percent of the tuition paying students of which are located in the United States; c) was not described in the first sentence of section 511(a)(2)(B) (relating to state colleges and universities); and d) the aggregate fair market value of the assets of which at the end of the preceding taxable year (other than those assets which are used directly in carrying out the institution s exempt purpose) is at least $500,000 per student of the institution. The Johnson Amendment The conference bill preserves nonprofit nonpartisanship by leaving current law intact. Private Activity Bonds The conference bill proposes no changes to current law. If this should pass, tax exempt organizations will need to factor this new excise tax into their overall tax planning and be aware that this extra payment may require budget cuts elsewhere. Under the current law, private foundations must pay an excise tax on their net investment income; public charities, including colleges and universities, however, are excluded. The bills proposal to also include the latter, however, has led many nonprofits to worry about whether this is setting up an unhealthy precedent for the future one where politicians are increasingly telling the sector how they should spend their philanthropic assets. Most organization see this as a positive and will prevent nonprofits from becoming vulnerable to political demands by donors.
CONTRIBUTIONS Increase the Charitable Contribution Deduction Limit The conference bill proposes to increase the charitable contribution deduction limit for an individual to 60 percent of his or her adjusted gross income (AGI), up from the current limit of 50 percent. Increase the Standard Deduction The conference bill proposes to nearly double the standard deduction for individuals and married couples filing jointly. The increase would be from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples, adjusted for inflation. Repeal the Pease Limitation The conference bill proposes to repeal the Pease limitation (named after former Senator Donald Pease), whose original intent was to raise tax revenue by increasing the taxable income for high income earners. It does this by reducing the value/benefits of several itemized deductions (including charitable contributions) once a taxpayer s AGI reaches a certain amount ($261,500 for single filers and $318,800 for married couples filing jointly). Cost Basis of Specified Securities The conference bill does not include an adjustment to the current law for identification of securities sold. Increase the Estate Tax Exemption and Repeal the Estate Tax The conference bill would maintain the estate tax, but temporarily through 2025 double the exemption to about $11 million for individuals and about $22 million for couples. A 10 percent increase in deduction limits appears to be an incentive for high income donors to give more to charity. However, this is unlikely in reality especially when considering that the population of tax payers who actually do give up to 50 percent of their AGI currently is quite small. There may not be many more individuals who would give up to 60 percent of their AGI. While an increase in the standard deduction benefits taxpayers, many nonprofits fear that it may lead to a reduction in overall giving, as tax filers have less incentive to itemize their deductions and consequently, less incentive to donate. In fact, the current proposals could lead to a decrease of between $4.9 and $13.1 billion in charitable giving, according to a study by the Indiana University Lilly Family School of Philanthropy. Since the Pease limitation reduced the benefits of itemized deductions (including charitable contributions), repealing it allows high earning taxpayers to go back to enjoying the full benefits of these deductions. It is anticipated that this measure could help prompt high earners to donate more to charity. Many nonprofits fear that an increase in the estate tax exemptions and/or the repeal of the estate tax could significantly reduce the incentive for people (especially wealthy individuals) to make charitable contributions. Under the current law, property in an estate is subject to a tax before it passes from a decedent to his or her beneficiaries. The first $5 million worth of transferred property is exempt from estate, gift, and GST taxes; however, any amount over the initial $5 million is subject to taxes. As wealth accumulates in a family, this $5 million limit plays a significant role when individuals are considering whether to donate. Many people would rather give their money to charity than see it go to taxes. However, an increase in tax exemptions from $5 to $10 million could greatly decrease an individual s incentive to donate, as more property can now be transferred to his or her beneficiaries tax free. An eventual repeal of the estate tax entirely could further significantly stamp out this desire to give.
ATHLETICS College Athletic Seating Rights The joint bill would repeal the current 80% deduction for contributions made for university athletic seating rights, effective for contributions made in tax years beginning after 2017. Entertainment Expenses The joint bill s provision provides that no deduction is allowed with respect to (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion thereof used in connection with any of the above items. Thus, the provision repeals the present law exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer s trade or business (and the related rule applying a 50 percent limit to such deductions). This could potentially affect an individual s willingness to purchase athletic tickets from the University as the price of the tickets significantly increases. For example, under the current law, an individual paying $5,000 for seating rights received a charitable deduction of $4,000 which in turn saved them $1,400 in taxes at the 35% bracket. This made the total cost for the seating rights significantly lower at only $3,600 rather than $5,000. This could potentially affect a business s willingness to purchase athletic tickets from the University as they could no longer receive a business deduction for the funds spent on entertainment costs. EDUCATION BENEFITS & EFFECTS ON STUDENTS American Opportunity Tax Credit (AOTC) The Interest Deduction on Student Loans The conference bill does not include this provision and the current law will stay the same. Qualified Tuition and Related Expenses Deduction The Exclusion of Interest from U.S. Savings Bonds used to pay higher education The conference bill does not include this provision and the current law will stay the same. Employer Provided Education Assistance The Qualified Tuition Reduction Programs The conference bill does not include this provision and the current law will stay the same.
Consolidation of Education Savings Plans The conference bill includes that new contributions to Coverdell education savings accounts after 2017 (except rollover contributions) would be prohibited, but tax free rollovers from Coverdell accounts into 529 plans would be allowed. See above. The bill provides elementary and secondary school expenses of up to $10,000 per year would be qualified expenses for 529 plans. The bill excludes certain homeschools expenses. The provision would apply to contributions made after Dec. 31, 2017. Rollovers from Qualified Tuition Programs to Qualified ABLE Programs The bill would permit taxpayers to rollover amounts from qualified tuition programs ( 529 accounts) to ABLE accounts without penalty, but only if the designated beneficiary (or member of the beneficiary s family) of the qualified tuition plan owns the ABLE account. Effective for distributions after the date of enactment, with a sunset before Jan. 1, 2026. See above. UNRELATED BUSINESS INCOME Fringe Benefit Expenses The bill would increase unrelated business taxable income by the amount of certain fringe benefit expenses for which a deduction is disallowed, effective for amounts paid or incurred after 2017. Separation of Trade or Business Activity The joint bill requires that organizations that carry on more than one unrelated trade or business separately calculate unrelated business taxable income for each trade or business, effectively prohibiting using deductions relating to one trade or business to offset income from a separate trade or business. The changes would apply to tax years beginning after 2017. Decrease of Corporate Tax Rate UBI is typically taxed at a corporate, the decrease in the corporate rate from 35% to 21% could potentially benefit exempt organization s subject to UBIT. The potential fringes included in this disallowed deduction could include any qualified transportation fringe, any parking facility used in the connection with qualified parking, or any on premises athletic facilities. This provision could increase taxable income as often organizations will have one activity that generates income that under current law they were able to offset with losses from other activities. These losses would have to be tracked separately and carried forward to only offset future income of that trade or business. Decreased corporate rate will allow for lower UBIT.
OTHER State and Local Tax Deduction For individual taxpayers effective for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026, the bill would cap the deduction for sales, income and property taxes at $10,000 ($5,000 for married taxpayers filing separately) (other than taxes which are paid or accrued in carrying on a trade or business); Domestic Production Activity Deduction The bill would repeal the deduction for domestic production activities for taxpayers effective for tax years beginning after Dec. 31, 2017. Carried Interest After 2017, transfers of applicable partnership interests held for less than three years would be treated as short term capital gain. This treatment would affect partnership in connection with the performance of substantial services to businesses that consist of engaging in capital market transactions or other specified investments. Certain equity interests and interests held by corporations would be exempt. This could potentially decrease the number of individual itemizing on their individual s income tax returns even further than doubling the standard deduction. Individuals whose itemized deductions would be over the standard deduction with their state tax income taxes and property taxes might fall below the standard deduction amount without those deductions. This could increase the impacts mentioned above under the doubling the standard deduction provision and may lead to a reduction in overall giving, as tax filers have less incentive to itemize their deductions.