Tax Reform Signals Change and Uncertainty for Tax-Exempt Organizations
Recently passed tax reform legislation has wide-ranging implications throughout American business and society, including tax-exempt organizations. While tax professionals analyze the minutiae of the bill to formulate guidance and advice, a few highlights can serve to illustrate the potential impact of the law on exempt organizations such as nonprofits, colleges and universities, nonprofit health care, associations, foundations, and others.
Perhaps the greatest uncertainty for many nonprofits is the potential impact on contribution revenue as a result of the increase in the standard deduction and lowering of tax rates. Beginning in 2018, taxpayers who choose the higher standard deduction would not be able to itemize their charitable contributions. Some say the change could drastically reduce donations as it removes one of the most-favored incentives. There may still be time to push for year-end charitable giving knowing the tax savings may be more valuable on gifts given before December 31, 2017.
While most of the provisions relate to for-profit businesses and individuals, here are some key areas drawing the attention of tax-exempt organizations:
- Tax-exempt bonds ― The final version of the bill preserves qualified 501(c)(3) bonds but repeals advance refunding bonds.
- Executive compensation ― A tax-exempt employer is liable for an excise tax of 21 percent on compensation in excess of $1 million for the top five highest paid employees and certain large severance payments. The implications may be significant since it applies to any individual who is included as a top-five highest paid employee any time after December 31, 2016 (i.e., once an individual is on the list, he or she stays there, so it could end up impacting more than five employees).
- Unrelated business income tax (UBIT) ― The lower corporate tax rates (top rate dropping from 35 percent to 21 percent) will apply to tax-exempt organizations established as a corporation that file Form 990-T to report UBIT. For those established as a trust, this rate does not apply. Each unrelated business activity will be taxed separately, and losses from one activity cannot be used to reduce taxable income from another activity. In addition, net operating losses arising after December 31, 2017, are no longer allowed to be carried back and carryforwards are only allowed to offset 80 percent of taxable income.
- Higher education endowment tax ― A 1.4 percent excise tax on net investment income on private colleges and universities with large endowments per student of at least $500,000.
- UBIT on fringe benefits ― UBIT of a tax exempt organization is increased by the amount spent on qualified transportation fringe benefits, parking facilities, and onsite gyms. As with the executive compensation, the goal was to make the tax treatment consistent with for-profit entities since those entities are not able to deduct such costs. While we do await specifics, we believe the impact of this provision may be limited.
- College athletic event tickets ― No deduction is allowed for payments made in exchange for the right to purchase tickets at an athletic event. Current law allows for 80 percent of the payment to be treated as a charitable contribution.
- Private foundation excise tax ― Once again, the provision to go to a flat 1.4 percent rate for private foundations was removed from the final bill. Current law is still in place.
How we can help
The new tax law has left many wondering where to turn for timely information, analysis, and guidance. Our nonprofit and health care tax professionals are ready to help you hit the ground running as you develop tax strategies in the coming year. We will continue to monitor developments in the weeks and months ahead.