Tax Cuts and Jobs Act – Tax-Exempt Organization Impact
Tax Cuts and Jobs Act:
Provisions Impacting Tax-Exempt Organizations
January 11, 2018
The Tax Cuts and Jobs Act of 2017 became law on December 22, 2017, with most of its provisions effective January 1, 2018. Regulations and further guidance to clarify many of the changes will be forthcoming. Below we summarize a few provisions of importance to our tax-exempt clients. The emphasis below is on the aspects of the law directly applicable to exempt organizations, but we also briefly summarize key changes to the tax rules for individuals that will alter the tax benefits of charitable giving for many donors. We welcome the chance to discuss these and any other issues you may encounter.
Provisions affecting tax benefits of charitable giving for individuals, effective January 1, 2018
- Standard deduction – The standard deduction for individuals increases from $6,350 to $12,000 ($12,700 to $24,000 for married couples).
- Charitable contribution deduction limit – Charitable contribution deductions are now limited to 60% of adjusted gross income (AGI) for cash gifts to public charities. An increase from 50% under prior law.
- Estate tax exemption – Beginning in 2018, the gift and estate tax exemption per individual doubles from $5 Million to $10 Million; indexed for inflation at approximately $11.2 Million for 2018 ($22.4 Million per married couple)
- Repeal of the “Pease” Limitation – The Pease limitation phased out the value of certain itemized deductions for individuals with AGI exceeding $261,500 ($313,800 for married couples). The new law suspends this limitation through 2025.
- No deduction for rights to purchase tickets to athletic events – Before 2018, taxpayers could deduct 80% of contributions to a college or university in exchange for rights to purchase tickets to athletic events. Under the new law, no deduction is allowed.
Certain fringe benefits now subject to Unrelated Business Taxable Income (“UBTI”)
IRC Section 512(a)(7) subjects the value of certain fringe benefits provided by the organization to its employees to the UBTI rules. If your organization provides employees qualified transportation fringe benefits (i.e. qualified parking or transit passes), these benefits under the new law will remain non-taxable to the employee, but the value of these benefits will be treated as UBTI to the employer. Organizations not previously subject to the UBTI rules may now have some amount of UBTI. A Form 990-T will be required if the total amount of UBTI exceeds $1,000. Quarterly estimated tax payments may also be required. If providing these benefits will create a tax liability for your organization, you may wish to consider increasing employees’ pay by an equivalent amount or replacing the transportation perk with other non-taxable benefits that will not generate UBTI.
UBTI separately computed for each trade or business activity
Beginning January 1, 2018, tax-exempt organizations, including those formed as nonprofit corporations, having more than one unrelated trade or business activity can no longer use losses from one activity to offset the income of another activity. The application of the new provision is fairly simple where an organization directly carries on business activities, i.e. operation of a gift shop or restaurant, but more complicated when the organization’s UBTI activities are indirect, i.e. passed through from partnership investments reported on an annual K-1. We expect the Treasury/IRS to issue further guidance, but it is likely that tax-exempt corporate investors will default to tracking losses for investment activities similar to the requirements of the passive loss rules applicable to individuals and trusts under IRC Section 469. The new law enacts a lower corporate tax rate (formerly 35% at the top rate, now reduced to a flat 21% rate after December 31, 2017) which will offset some of the impact of the suspended losses, but the overall impact will need to be analyzed on a case by case basis.
Excise tax on excess executive compensation
If your organization pays a covered employee more than $1 million in annual compensation, the organization may be subject to an excise tax at the corporate rate of 21% on the amount of compensation exceeding $1 million. Compensation paid by related entities is aggregated. Covered employees are those among the 5 highest compensated. The new provision excludes certain medical professionals.
Limitation on net operating loss deduction
For losses incurred after December 31, 2017, the net operating loss deduction for the UBTI of corporations on Form 990-T will now be limited to 80% of taxable income.
Excise tax of 1.4% on investment income of private colleges and universities
Applicable educational institutions will now be subject to a 1.4% excise tax on their investment income. An applicable educational institution is an organization that a) had at least 500 tuition paying students during the previous tax year, b) held assets (at the end of the previous tax year) other than assets used in directly carrying out the institution’s exempt purpose of at least $500,000 per student, and c) has more than 50% of tuition paying students located in the United States. Please let us know if you or a related organization may be subject to this provision and we can assist in planning.
Changes to treatment of certain tax exempt bonds
If your organization issues tax-exempt bonds, you should read and inquire further into the repeal of credit bonds and changes to the treatment of interest from advance refunding bonds. Please contact us to see if these provisions might apply to your bond issuances.