2017 Tax Reform Bill: Key Provisions Affecting Tax-Exempt Organizations

January 17, 2018 | Dori Eggett

Dori Eggett | Tax Director

With more than 20 years of experience, Dori primarily serves nonprofit and tax-exempt clients assisting with strategic planning and compliance issues including Forms 990 and 990-T, unrelated business income, as well as...

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On December 22, 2017, the President signed new tax legislation, resulting in the most sweeping reform to tax law since 1986.  Many are still being worked through and new regulations are undoubtedly forthcoming, so this summary of provisions affecting the nonprofit sector is just an overview until we have more guidance from the Treasury. Below are the notable changes for tax-exempt organizations:

Unrelated Business Taxable Income

Image of American flagUnrelated Business Taxable Income (UBTI) is taxed under the corporation income tax rate structure.  Because the maximum corporate income tax rate was reduced from 35% to 21%, some nonprofits could benefit from the lower rates.

UBTI must be tracked separately for unrelated business activities.  Losses from one activity may no longer offset income from another.  Additionally, net operating losses may only carry forward to offset against income from the same activity and are limited to 80% of taxable income.  Net operating loss carrybacks are no longer allowed.  Further details are not yet available on how “separate activity” is defined and how this may or may not affect alternative investments.  The Treasury Department is tasked with providing regulations that clarify the details and definitions for this tax reform provision.  

UBTI is increased by the value of certain non-taxable employee benefits, including transportation, parking, and on-site athletic facilities.  This mirrors the provision that eliminates the deductibility of such benefits for taxable entities by taxing the value as UBTI at the corporate rates.

Cap on Executive Compensation

A new 21% excise tax is imposed on tax-exempt organizations for paying executive compensation to an individual in excess of $1 million.  The “executive” designation generally includes the organization’s top five highest-compensated individuals and includes former employees.  Compensation from related organizations is aggregated to determine the $1 million threshold and includes deferred compensation amounts that are treated as paid when there is no substantial risk of forfeiture (as defined under Section 457(f)).  There is an exception for licensed doctors, nurses, and veterinarians for their performance of medical or veterinary services.  This excise tax is designed to bring nonprofit salary rules in line with the cap on compensation deductible by taxable entities.

Investing and Financing

A 1.4% excise tax is imposed on net investment income of private colleges and universities with more than 500 students and assets in excess of $500,000 per student.  Assets used directly for educational purposes are not included in the calculation.  Assets of certain related organizations (e.g., a supporting organization to the college or university, as described in 509(a)(3), or a related organization that is controlled by the educational institution) would be aggregated with those of the school.  Details for calculating total assets are forthcoming from the Treasury.  In its current form, the provision does not apply to state colleges and universities and is limited to institutions of higher education with more than 50% of students in the U.S.  

The income exclusion for interest from advanced refunding tax-exempt bonds issued after December 31, 2017 is repealed.  The final bill preserved use of tax-exempt private activity bonds, including qualified 501(c)(3) bonds, which many nonprofits use to finance building and renovation projects.

A new provision allows for the designation of “qualified opportunity zones” within low-income communities to spur economic growth by allowing deferral of capital gains on sales of appreciated property if certain requirements for reinvestment are met.  

For Donors

The limit on cash donations is increased to 60% of a taxpayer’s adjusted gross income (AGI).  The standard deduction is increased to $12,000 and $24,000 for individuals and married couples filing a joint return, respectively.  These provisions would sunset after 2025.  Easing the AGI limitation is helpful but will only impact the less than 10% of taxpayers who would itemize deductions under the new law.  The net effect to the nonprofit sector is estimated to be $13 billion in reduced charitable giving each year [National Council of Nonprofits, December 15, 2017]. 

The estate, gift, and GST exemption is doubled to $10 million.  This provision sunsets after 2025.  The effect to the nonprofit sector is estimated to be $4 billion in reduced charitable giving each year [National Council of Nonprofits, December 15, 2017]. 

An “above-the-line” universal deduction for charitable contributions was not included in the tax reform.  However, the Universal Charitable Giving Act has been proposed by members of Congress to allow non-itemizers to deduct up to $4,000 per individual and $8,000 per couple each year.

The 80% deduction for amounts paid in exchange for college/university athletic seating rights is repealed.  No charitable contribution deduction is allowed for payments after December 31, 2017 that are associated with rights to purchase tickets for athletic events in the college/university’s stadium.

The tax act repealed an unused provision in the tax code that allowed the IRS to create an optional tax return that nonprofits could file in lieu of providing donors with written acknowledgement of contributions.  This was a needed cleanup measure designed to block the IRS from requiring charities to collect and report donors’ Social Security numbers and other sensitive personal information in order to substantiate charitable contributions.

The reduction in corporate income tax rates may also reduce corporate charitable giving because the tax savings are decreased.  Charities can reduce the negative impact by focusing on attracting qualified sponsorships from corporate donors.  Sponsorship arrangements provide positive PR and increase the company’s visibility in the community, while being fully deductible as ordinary and necessary business expenses.  

We will continue to keep you apprised of further developments as more details become available.  Please don’t hesitate to reach out to Dori Eggett, tax director, or Ryan Harris, tax senior manager, at 303-740-9400 for more information about these new tax law changes.