The 2017 Tax Reform legislation, the most significant federal tax law reform in more than 30 years, was passed by both the House of Representatives and the Senate, and was signed into law by the President on December 22, 2017.
The “Tax Cuts and Jobs Act” (TCJA) lowered business and individual tax rates, and changed U.S. international tax rules. The following are highlights of the law which are relevant to nonprofits and private foundations.
The TCJA increased the standard deduction to $24,000 for married filing jointly and $12,000 for single filers. More taxpayers may not itemize and those who do not itemize will not receive a direct tax benefit for charitable contributions.
Currently, contributions of cash to qualified charities are limited to 50% of a taxpayer's adjusted gross income (AGI) for the year. The new law increases the threshold for cash contributions to 60% of AGI, and, beginning in 2018, the law denies a charitable contribution deduction for payments made in exchange for college athletic event seating rights.
No charitable deduction is allowed for contributions of $250 or more unless the donor substantiates the contribution by a contemporaneous written acknowledgment from the recipient organization. In 2015, the Internal Revenue Service (IRS) issued proposed regulations for organizations to report donations with the intent to shift the onus of substantiation to the donee. In 2016, the proposal was withdrawn because charitable organizations were concerned about collecting and maintaining donor social security numbers and other forms of identification. Affirming the validity of these concerns, the TCJA withdrew the IRS’s ability to promulgate regulations regarding donee substantiation.
Estate and Gift Taxes
The new law did not repeal the estate tax. Instead, the lifetime estate and gift tax exemption, for estates of decedents dying and gifts made after December 31, 2017 and before January 1, 2026, was increased to $11.2 million per person on January 1, 2018.
Political Contributions & Donor Advised Funds (No Change)
After much deliberation, the bill did not change the rules relative to political activities in which exempt organizations can engage, nor the manner in which Donor Advised Funds operate.
New Excise Taxes
Excise Tax on Excess Compensation
For tax years beginning after December 31, 2017, a 21% tax is imposed on organizations exempt under IRC §501(a), as well as farmers’ cooperatives, governmental entities, and political action committees, on remuneration in excess of $1,000,000 paid to covered employees. Remuneration encompasses all compensation received, including compensation from related entities and amounts vested under nonqualified deferred compensation plans. Covered employees generally consist of the five highest-compensated current and former employees.
The excise tax is also applicable to “excess parachute payments,” defined as compensation which exceeds three times a covered employee’s average annual compensation, and which is contingent on the employee’s separation from employment.
Investment Income of Private Colleges and Universities
For taxable years beginning after December 31, 2017, the TCJA imposes a new tax equal to 1.4% on the net investment income of accredited public, nonprofit, and proprietary postsecondary institutions with at least 500 tuition paying students, more than 50% of whom are located in the United States, and which have non-operating assets greater than $500,000 per student.
Unrelated Business Income Tax Changes
Beginning after 2017, the TCJA reduces the top tax rate for trusts to 37% and creates a flat 21% tax rate for corporations.
Disaggregation of Business Activities & Net Operating Losses (NOLs)
After December 31, 2017, organizations must segregate their unrelated business activities. Losses from one activity may not be used to reduce the taxable income from another activity.
In following, NOLs must be segregated, and can be used only to offset income from the same activity. NOL deductions are limited to 80% of taxable income for losses incurred in tax years beginning after December 31, 2018. Treasury is charged with providing regulations on how to apply this new provision. It remains unclear whether investment activities which generate unrelated business income are required to be disaggregated.
In 2018, tax-exempt organizations must include in unrelated taxable income the value of certain non-taxable employee benefits. Parking and transportation benefits not taxable to employees and on-site athletic facilities will be subject to unrelated business income tax. Treasury is tasked with developing guidelines as to what direct and indirect expenses can be allocated to offset said taxable income.
Proposals Removed by Final Bill
Below are items that were considered, but not included in the final version of the TCJA:
- Adjusting the mileage rate people can claim for use of personal vehicles for volunteer charitable services
- Changes to charitable contributions from Individual Retirement Accounts (IRAs)
- Removing the exemption of royalty income from an organization’s name and logo from unrelated taxable income
- Simplifying the private foundation excise tax rate to 1.4%
- Modifying private foundation excess benefit rules and excess business holding rules
- Eliminating or altering the Low Income, Historic, and New Markets Tax Credits
- Removing the student loan interest deduction
- Elimination of public service loan forgiveness programs
California does not conform to changes set forth by the TCJA at this time.
BPM is Here to Assist You
The Tax Cuts and Jobs Act can have a significant impact on nonprofits and private foundations. For additional questions, we encourage you to contact a BPM advisor to understand how these changes specifically impact your organization.