Provisions of the 2017 Tax Cuts and Jobs Act, H.R. 1, (TCJA), are expected to have significant impacts on charitable giving, among other changes that will affect not-for-profit organizations. The main provisions of the TCJA affecting nonprofits are discussed below. Except where otherwise noted, all of these provisions take effect on January 1, 2018, so they will not affect 2017 taxes.
Fewer Taxpayers Will Benefit from Charitable Contributions
The TCJA retains the tax deduction for charitable contributions, which has been part of the tax code for almost 100 years. In fact, it enables taxpayers to contribute more and take a deduction. Under prior law, taxpayers could not deduct more than 50% of their adjusted gross income (AGI) in charitable contributions. The TCJA increases this limit to 60%, which will help wealthy donors to give more each year. The provision retains the 5-year carryover period to the extent that the contribution amount exceeds 60 percent of the donor’s AGI.
However, taxpayers may deduct charitable contributions only if they itemize their personal deductions instead of taking the standard deduction. If you don’t itemize, you get no deduction. Currently, about 30% of all taxpayers itemize. As you might expect, the higher a taxpayer’s income the more likely it is that he or she will itemize. Itemizers are far more likely to donate to charity than nonitemizers. 83% of itemizers report giving to charity compared with only 44% of nonitemizers. Non-itemizers contribute less than 20% of total charitable giving.
A taxpayer should itemize only if his or her personal deductions—such as charitable contributions, mortgage interest, property tax, medical expenses—exceed the applicable standard deduction. For 2017, the standard deduction is $6,350 for singles and $12,700 for marrieds filing jointly. The TCJA roughly doubles these amounts to $12,000 for singles and $24,000 for marrieds filing jointly. As a result, the Urban-Brookings Tax Policy Center estimates that less than 5% of taxpayers will itemize.
Additionally, the TCJA reduces tax rates at most income levels, which lessens the tax benefit of making a charitable contribution by those who continue to itemize. For example, under the TCJA the top tax rate is 37%, instead of 39.6% under prior law. Thus, wealthy individuals who do itemize will save 2.9% less in tax by making contributions
A study by the Indiana University School of Philanthropy and Independent Sector concluded that changes such as these will reduce charitable giving by 1.7% to 4.6%. That’s an annual reduction between $4.9 and $13.1 billion. Others estimate the losses could amount to as much as $20 billion per year.
The TCJA also reduces the number of taxpayers subject to the federal estate tax.
Under the new law, estates worth up to $11 million per person ($22 million per married couple) are exempt from the federal estate tax starting in 2018, double the amount in 2017. (Expires in 2026.) One of the main reasons wealthy individuals make charitable bequests in their wills is to help avoid estate taxes. Charitable bequests are not subject to this tax. Total bequest giving in 2016 was estimated at $30.36 billion, which amounted to 8% of total charitable giving. Doubling the estate tax exemption may reduce such charitable bequests in 2018 and later. Estimates vary as to how much.
More Nonprofits May Have to Pay UBIT
Subject to numerous exceptions and exemptions, tax-exempt nonprofits that operate businesses unrelated to their charitable mission must pay an unrelated business income tax (UBIT) on their net unrelated business income. Under prior law, a nonprofit that operated multiple unrelated businesses could deduct the losses from one business from the profits from another to determine the amount of net unrelated business income subject to UBIT. The TCJA does not allow this. Starting in 2018, 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.
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.
In addition, donors will no longer be allowed to deduct as a charitable gift 80% of the cost of purchasing seat licenses to purchase tickets at college and university athletic events.
New Excise Tax On High Nonprofit 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.
Additional 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%.
- Educational Savings Plans. Section 529 plans will be available for elementary and secondary tuition.
- 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.
Any questions?
The TCJA is the largest overhaul of the tax code in more than 30 years, and we’ve covered only the highlights of the not-for-profit related tax provisions here. Please contact your Warady & Davis LLP advisor at (847) 267-9600 if you have questions about how they may affect your organization.
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