Since the release of the H.R. 1, “the Tax Cuts and Jobs Act” (the Bill), not-for-profit organizations have been looking for the silver lining and trying to figure out how they may be impacted by the new provisions. While the Bill affects charitable giving from individual taxpayers, private foundation income, public charities, colleges and universities, and donor advised funds, it affects each of them in very different ways. In this summary, we’ll look at exactly who is impacted and what this means for the future of charitable giving.
Modifications for Charitable Giving
There are several potential provisions that will impact the tax-exempt sector. The proposal that will be effective for taxable years beginning after December 31, 2017, may include the following provisions:
- Increased percentage limits for contributions of cash to public charities to 60% from 50%
- Denial of the deduction for college athletic event seating rights
- Repeal of substantiation exception for certain contributions reported by the donee organization
Tax-exempt entities can also look for a possible increase in unrelated business taxable income by the amount of certain fringe expenses for which a deduction is disallowed. For example, tax exempt entities will be taxed on the value of providing their employees with transportation fringe benefits, on-premises gym and other athletic facilities by treating the funds used to pay for such benefits as unrelated business income. This will be effective for taxable years beginning after December 31, 2017.
Currently, it is unclear whether certain State and local entities (such as public pension plans) that are exempt under section 115(I) as a government sponsored entity as well as section 501(a) are subject to the UBIT rules. Under the proposal, all entities exempt from tax under section 501(a) notwithstanding the entity exemption under any other provision of Code would be subject to the UBIT rules. This would go into affect for tax years beginning after 2017.
Simplification and Reform of Education Incentives
Education incentives will also get a facelift. Possible provisions that may go into effect for taxable years beginning after December 31, 2017 include:
- Reform of the American Opportunity Tax Credit.
- Repeal of Lifetime Learning Credit.
- Repeal of deduction for student loan interest.
- Repeal of deduction for qualified tuition and related expenses.
- Repeal of Section 127 Educational Assistance Plans.
- Repeal of the exclusion of U.S. Savings Bonds interest used to pay higher education tuition and fees.
- Repeal of exclusion for qualified tuition reductions for certain education provided to employees (and their spouses and dependents) of certain educational institutions.
Under the provision in the tax reform legislation, certain private colleges and universities would be subject to a 1.4 percent excise tax on net investment income. This new excise tax would not apply to state colleges and universities. The provision would only apply to private colleges and universities that:
- Have at least 500 students; and
- Have cash and investment assets (other than those used directly in carrying out the institution’s educational purposes) valued at the close of the preceding tax year of at least $250,000 per full-time student. This $250,000 threshold was initially set at $100,000, but was increased by an amendment on November 6, 2017.
Other Provisions
There are several other important provisions that affect not-for-profit entities.
- Repeal of private activity bonds. The Bill provides that interest income from newly issued bonds would be included in taxable income.
- Tax-exempt organization will be subject to a 20% excise tax on compensation over $1,000,000 and on excess parachute payments.
- Churches and certain other religious organizations can make statements concerning political campaign or candidate for office in the ordinary course of religious services without endangering their tax-exempt status as long as minimal expenses are incurred.
- The 1% or 2% net investment excise tax for private foundations is replaced by a flat 1.4 percent tax rate.
- The exclusion from UBI for income from certain research organizations would be only limited to research results which are freely available to the public. This provision does not affect the treatment of income from research performed by colleges, universities, and hospitals.
- The exclusion for the value of employer provided housing as a condition of employment is being set to $50,000 and is phased out for highly compensated employees.
- Organizations that sponsor donor advised funds would be required to disclose additional information on their form 990.
What’s to Come
The Senate Finance Committee released its own version of a tax reform proposal late last week. We will summarize the Senate provisions in a separate news alert to be released shortly. Republican lawmakers have said they hope to have bills passed through the House and Senate by Thanksgiving, so that a final bill can be completed, passed, and signed into law in December. This a very short timeline.
For more information about this tax reform and how it may affect your not-for-profit, consult your local Sikich representative or visit us at https://www.sikich.com/.
