Mission Matters Insights
How Will Tax Reform Affect Nonprofits?February 02, 2018
There are a number of provisions in the TCJA that directly impact the tax exempt sector and charitable giving. Learn how changes to deductions and executive compensation will affect your charitable organization.
On December 22, 2017, President Trump passed the “Tax Cuts & Jobs Act” which is the first major tax code overhaul in over 30 years. Below is a summary of the changes and how they will affect nonprofits.
Increases the Standard Deduction from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples. With fewer individuals itemizing deductions this could have an impact on an individual’s incentive to donate to philanthropic interests.
Increase the Charitable Contribution Deduction Limit to 60% of adjusted gross income (AGI), up from 50%. Although this may be an incentive for high-income donors to increase donations, some believe otherwise, only time will tell.
Repeals the “Pease” Limitation (Named after Senator Pease) reduces the value/benefits of several itemized deductions (including charitable donations) when a tax payer’s AGI reaches a certain amount ($261,500 for individuals and $313,800). This limitation sunsets in 2025. Without this limitation, high income earners may donate more to charities since they are now receiving the full benefit of the deductions.
Increases the Estate Tax Exemption from $5 million to $10 million. This provision sunsets in 2026, then returning to its current level. This could significantly reduce charitable giving since a high net worth individual can now transfer more property to beneficiaries’ tax free.
Tickets to College Athletic Events. Contributions made to a College or University are no longer allowed as a charitable deduction when the donor receives priority seating for an athletic event. Previously, the donor was able to deduct 80% of the donation.
Repeals the exclusion from gross income interest on a bond issued to advance refunding on another bond (Advanced Refunding Bonds (ARB)). Advanced refunding is a financing technique that allows an issuer to obtain the benefit of lower interest rates when the outstanding bonds are not callable. Nonprofits use ARB’s to reduce the cost of borrowing for construction and capital expenditures. Interest paid to ARB investors is now taxable.
Imposes an Excise Tax on Executive Compensation of 21% on covered employees making in excess of $1 million. A covered employee is an individual who is one of the five highest compensated employees of the tax year or was a covered employee of the organization for the preceding tax year beginning after December 31, 2017. An organization must also take into account if the covered employee received compensation from a related party. Certain medical professionals are excluded from the definitions of a covered employee.
Imposes an Excise Tax on Endowments of Nonprofit Colleges and Universities of 1.4% that qualify as an applicable educational institution. An applicable education institution is one that a) had 500 tuition paying students in the preceding taxable year; b) the aggregate fair market value of the assets of the preceding tax year was $500,000 per student (this does not included assets directly related to carrying out the institutions tax exempt purpose); and c) 50% of the paying tuition students are located in the US.
Modifications to the Unrelated Business Income Tax (UBIT) no longer allows an organization to take the loss of one business activity and deduct it from the profit of another business activity. An organization is allowed to carry forward the loss from business activity to another year reducing taxable income from the same business activity. On the plus side, the corporate income tax rate has been decreased from 35% to 21% which means Nonprofits will be paying a lower tax rate.
It is important that every nonprofit organization assembles a team to better understand what impact this legislation will have on their organization. These changes are expected to have a direct impact on nonprofit organizations and staying ahead of them will be instrumental to the future services nonprofits are able to provide. Our team can help you understand these rules- don’t hesitate to call.