On December 22, 2017 the Tax Cuts and Jobs Act (the “Act”) was signed into law by President Trump, affecting all organizations, including nonprofits. Here are some key provisions of the Act and how they relate to nonprofit organizations.
Contributions Hurt by Limit on Itemized Deductions and Lower Rates
The Act increases the standard deduction for individuals (to $12,000), couples (to $24,000) and heads of households (to $18,000). Consequently, it’s estimated that more than 90% of taxpayers will claim the standard deduction, as compared to approximately 70% before the Act. In order for a taxpayer to receive a deduction for a contribution they have to itemize deductions and not use the standard deduction. Therefore more than 90% of taxpayers will not receive a tax benefit for any donations they make. For taxpayers who are able to itemize, the Act repeals the “Pease” limitation, which set an overall limit on itemized deductions including charitable contribution deductions. The income-based limitation for cash contributions to public charities and certain private foundations are increasing from 50 percent to 60 percent. The National Council of Nonprofits estimates the change in the standard deduction will reduce the amount of charitable giving by $13 billion or more each year and will cost between 220,000 and 264,000 non profit jobs. Lower tax rates in the Act further serve to reduce the value of charitable contributions to donors.
One benefit the Act did not affect was the ability to make a qualified charitable distribution (QCD) directly from an IRA. So, for a taxpayer who might consider itemizing, a QCD continues to offer several benefits. First, a QCD counts toward satisfying the individual’s required minimum distribution for that year. Second, the distribution is excluded from the taxpayer’s income; since the contribution isn’t included in income it is in effect a charitable contribution deduction for the donor.
Denial of Charitable Deduction for College Athletic Event Seating Rights
The Act removes tax deductions for contributions related to season tickets for college athletic events. The new tax law will remove an 80% deduction that was previously allowed for taxpayers for donations made in exchange for an opportunity to buy season tickets. The House Ways and Means Committee projects the adjustment will net the government $200 million per year. It is expected to cost individual colleges millions of dollars, as it’s unclear how many alumni or fans will continue to make these donations now that they can’t be taken as tax deductions.
Tax on Highly Compensated Nonprofit Employees
The Act imposes a new 21% entity excise tax on annual compensation paid in excess of $1 million or more to the top five highest paid employees of a nonprofit organization. Certain restrictions do apply.
Inclusion of Certain Fringe Benefits in the Calculation of Unrelated Business Income Tax
Certain fringe benefits provided to employees (qualified transportation fringe benefits, a parking facility used in connection with qualified parking or any on-premises athletic facility) are now considered in the calculation of unrelated business taxable income. Tax exempt organizations providing these types of benefits to their employees will be required to pay a corporate tax rate on the value of these benefits.
Unrelated Business Income Tax (UBIT)
The Act requires that UBIT be calculated separately for each unrelated trade or business activity. Previously, an organization was able to aggregate all of its income and deductions from all of its businesses in computing UBIT. Net operating losses (NOLs) are now only available for the trade or business from which the loss arose. An NOL from one line of business cannot be used to offset taxable income from another.
Net Operating Loss Deductions
Previously, net operating losses (NOLs) could be carried forward 20 years or back 2 years to offset unrelated business taxable income. The Act takes away the ability for a nonprofit organization to carry back any NOLs incurred in 2018 or later. NOLs can now be carried forward indefinitely, and any losses incurred in 2018 or afterward can only be used against 80% of the organization’s unrelated business taxable income. Therefore, organizations will not be able to use NOLs to entirely eliminate income that is earned from unrelated business activities.
Change in the Estate Tax
The Act doubles the exemption for estates of decedents. As a result, fewer estates will be subject to taxes. The lower exemption rate encouraged donors to make deductible charitable bequests to reduce the value of their estate subject to taxes. The Act will most likely reduce the incentive to make charitable bequests for those estates no longer subject to the estate tax. The National Council of Nonprofits estimates that this will lower charitable contributions by $4 billion annually.
Some items that were discussed, but did not make it into the final bill:
Private Foundation Excise Taxes – The current 1% or 2% excise tax on investment income of private foundations is not changed from current law.
Donor-Advised Funds –There will not be an increase in the reporting and disclosure of donor-advised funds.
Charitable Mileage Deduction –No changes to allow the volunteer mileage rate to be adjusted for inflation.
Political Campaign Activity (Johnson Amendment) –501(c)(3) organizations are still prohibited from endorsing or opposing political candidates.
Private Activity Bonds –No changes to the current law. The House passed version included a provision to make interest on these bonds taxable.
If you would like more information, or would like to discuss any aspect of the Tax Cuts and Jobs Act and how it affects your nonprofit organization, please do not hesitate to contact our office.
Please note that the information contained in this blog, including comments posted by visitors, is provided for informational purposes only and cannot be relied upon for any financial decisions. It should not be construed as, nor is it intended to be, a substitute for obtaining accounting, tax, or other financial advice from an appropriate professional. The reader is directed to consult with their own adviser for guidance on anything contained herein.