Provisions of the 2017 Tax Cuts and Jobs Act, H.R. 1, are expected to have significant impacts on charitable giving, among other changes that will affect not-for-profit organizations. This article summarizes the changes that not-for-profits are following closely.
Highlights of interest to not-for-profit organizations
Decrease in Corporate Tax Rate. The corporate tax rate drops from a top rate of 35% to 21%.
Charitable Contributions. The income-based limitation for cash contributions to public charities and certain private foundations are increasing from 50 percent to 60 percent. The provision retains the 5-year carryover period to the extent that the contribution amount exceeds 60 percent of the donor’s AGI.
Educational Savings Plans. Section 529 plans will be available for elementary and secondary tuition.
Excise Tax on some Private Colleges and Universities. There is a 1.4% excise tax on the net investment income (to be defined) of private colleges and universities who are “applicable educational institutions” (AEIs)—generally meaning the school has at least 500 students and 50% of its students are located in the U.S. The “threshold” computation applies to AEIs with an aggregate fair market value of the assets at the end of the preceding taxable year (other than those assets that are used directly in carrying out the institution’s exempt purpose) of at least $500,000 per student.
Each Unrelated Business Activity Stands Alone with Respect to Profit/Loss. A deduction from one trade or business for a taxable year may not be used to offset income from a different unrelated trade or business for the same taxable year. For an organization with more than one unrelated trade or business, the provision requires that unrelated business taxable income first be computed separately with respect to each trade or business and without regard to the specific deduction. There is a transition rule that says net operating losses arising in a taxable year before January 1, 2018 that are carried forward to a future taxable year are not subject to this rule.
Estate Tax. The estate tax is retained with the exemption amount doubled. (Expires in 2026.)
Excess Compensation. There is a 21% excise tax in excess of $1 million paid to a covered employee (i.e., one of the five highest compensated employees of the organization) by an applicable tax-exempt organization when there is no substantial risk of forfeiture of the rights to such remuneration (as defined at IRC Section 457(f)(3)(B)C). There are several limitations and exemptions to this rule.
UBIT on Certain Fringe Benefits. Unrelated business taxable income includes any expenses paid or incurred by a tax-exempt organization for qualified transportation fringe benefits, a parking facility used in connection with qualified parking or any on-premises athletic facility, provided such amounts are not deductible under Section 274.
Repeal of Advance Refunding Bonds. Interest on advance refunding bonds (i.e., refunding bonds issued more than 90 days before the redemption of the refunded bonds) is taxable. Interest on current refunding bonds continues to be tax-exempt. The provision is effective for advance refunding bonds issued after 2017.
Suspension of Moving Expenses. The provisions suspend the moving expense deduction and qualified moving expense reimbursements through 2025, with exclusions for active duty military.
What did not make it into the final bill?
Political Campaign Activity. The current “Johnson Amendment,” which prohibits any political activity by 501(c)(3) organizations, is not affected.
Private Foundation Taxes. The current 1% or 2% structure for taxes on investment income of private foundations is not changed from current law.
Tuition Reduction/Remission Rules Not Affected. Qualified tuition reductions will remain non-taxable.
Employer-Provided Educational Assistance Intact. The Section 127 provision for the non-taxability of certain employer educational assistance is not repealed.
Housing for the Convenience of the Employer. The House bill contained a provision to provide limits on the amount that could be excluded from an employee’s income for employer-provided housing. This provision is not in the final bill.
UBIT on Research Activities. The House bill included a modification that subjected income from research activities whose results were not publicly available to unrelated business income taxes. The final bill does not include this provision.
Donor-Advised Fund Reporting. The final bill does not incorporate the House provision to increase reporting and disclosure of donor-advised funds.
Private Activity Bonds. The House bill included a provision to make interest on private activity bonds taxable. This provision is not included in the final bill.
Inflation Adjustment for Charitable Mileage Deduction. The House proposed a provision to repeal the statutory charitable mileage rate and provide instead that the standard mileage rate used for determining the charitable contribution deduction shall be a rate which takes into account the variable costs of operating an automobile. This is not included in the final bill.
Other provisions of interest:
Individual Tax Brackets. Seven individual tax brackets are set at 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Standard Deduction. The final bill nearly doubles the standard deduction, increasing it to $24,000 for married couples and $12,000 for individuals.
Personal Exemptions. The final bill repeals the deduction for personal exemptions.
Individual Mandate. The individual mandate of the Affordable Care Act is effectively repealed.
Child Tax Credit. The child tax credit doubles to $2,000 per child and is refundable up to $1,400 per child. A phase-out starts at $400,000 of income. (This provision is set to expire after 2025.)
Alternative Minimum Tax. The corporate alternative minimum tax is repealed. The individual alternative minimum tax remains, with the phase-out threshold increased to $1,000,000 for married couples.
SALT “Buffet.” The final bill provides a state and local tax (SALT) “buffet,” with up to $10,000 of property taxes, state/local income taxes, and/or sales taxes being deductible in any combination up to the limit.
Mortgage Interest. The mortgage deduction does not change, but the limitation on the mortgage amount is now $750,000, down from $1,000,000 limit.
Medical Expenses. Medical expenses exceeding 7.5% of AGI will be deductible for 2017 and 2018.