Tax Reform Impact on Tax-Exempt Organizations
When designing its tax reform bill, Congress did not overlook tax-exempt organizations. The Tax Cuts and Jobs Act of 2017 (TCJA) includes provisions relating to unrelated business taxable income, executive compensation, and investment income. Beyond the impact the new law has on tax-exempt organizations, individual donors’ charitable giving will also be affected.
Changes That Affect Individual Donors
- Beginning in 2018: The opportunity to deduct charitable contributions is limited by the new law. Donors can deduct the greater of their “itemized” deductions (which includes charitable contributions) or the “standard deduction.” The new law increases the standard deduction to $24,000 (previously $12,700) for married couples filing jointly and $12,000 (previously $6,350) for single filers. In order for donors to be able to deduct charitable contributions, their total itemized deductions (which generally includes charitable contributions, state and local taxes up to $10,000, and mortgage interest) must exceed the standard deduction. Because of the significant increase in the standard deduction, the new law might negatively impact charitable contributions.
- Beginning in 2018: The new law raises the adjusted gross income limitation on charitable contributions to 60 percent (previously it was 50 percent for cash contributions), so more of donors’ gifts may be deductible in one tax year, assuming they itemize. This limitation is only relevant in years where contributions are high relative to overall income.
- Beginning in 2018: Contributions made to a university for seating rights at athletic events will no longer be deductible (previously 80 percent of such gifts were deductible).
Unrelated Business Taxable Income (UBTI)
- Beginning Jan. 1, 2018: If an organization has more than one unrelated trade or business, the income and expenses must be computed separately for each trade or business. That is, deductions related to one trade or business cannot be used to offset income from another. Organizations subject to this rule should consider moving unrelated business activities into a for-profit subsidiary to possibly avoid this rule.
- Beginning Jan. 1, 2018: Organizations must include in their UBTI the amount of certain nondeductible fringe benefit expenses. These include any qualified transportation fringe, any parking facility used in connection with qualified parking, and on-premises athletic facilities.
Excise Tax on Tax-Exempt Organization Executive Compensation
- Tax years beginning after 2017: The new law imposes a 21 percent excise tax on compensation in excess of $1 million paid to any one of a tax-exempt organization’s five highest-paid employees during a tax year (or any employee who was in that category in any prior year after 2016). The excise tax also applies to certain parachute payments, and is payable by the organization.
- The new law treats compensation as paid when rights to remuneration are not subject to a substantial risk of forfeiture, but excludes amounts paid directly to certain medical professionals for performance of services.
Excise Tax on Investment Income of Private Colleges and Universities
- Tax years beginning after 2017: The new law imposes a 1.4 percent excise tax on the net investment income of certain private colleges and universities and their related organizations.
- This provision applies only to private institutions that have more than 500 students, have at least 50 percent of their students located in the United States, and have assets of at least $500,000 per full-time student (not including assets used directly by the institution in carrying out the institution’s educational purpose). The assets and net investment income of related organizations are treated as the assets of the private college or university.
For questions on how these or other new tax provisions apply to your tax-exempt organization, please contact your KSM advisor. Additional information regarding tax reform, long-term planning strategies, and more can be found here.
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