Tax Cuts and Jobs Act: Impact on Not-for-Profits
The Tax Cuts and Jobs Act (“Act”) was signed into law on the December 22, 2017 incorporating many changes to the tax code that will affect tax exempt organizations. Areas impacted may include: charitable giving, new excise taxes related to certain activities of not-for-profit organizations and provisions specific to education institutions.
There are certain provisions in the law that may affect charitable giving. These include, but are not limited to, adjustments to the itemized deduction and increases to charitable giving limitations with the elimination of the cap on total allowable itemized deductions.
On the potential negative side for charities, the Act increases the standard deduction for individuals and couples to $12,000 and $24,000, respectively. As a result, many individuals may use the standard deduction instead of the itemized deduction. The potential consequence of this change estimates a reduction to charitable giving by approximately $13 billion per year.
On the positive side, the limitation on charitable donations has been increased from 50% to 60% of adjusted gross income, which may help to increase donations to charitable entities by larger donors. The 50% limitation is still effective for donations of property.
Finally, the Act eliminates the cap for higher wage earners on allowable itemized deductions including, charitable contributions. Combined with the increased percentage of adjusted gross income, these provisions may have a positive effect on donations to charitable entities.
Unrelated Business Taxable Income
The Act has several provisions that will significantly affect the reporting of unrelated business income by tax-exempt entities. First, all unrelated business taxable income will taxed at a rate of 21% rather than the previous tax rate of 35%. Secondly, the Act will require that all streams of unrelated business income be reported separately rather than in the aggregate. Further losses from one unrelated activity may not be used to offset gains from another unrelated activity. In addition, the Act also changes how much of the net operating loss carry forward can be applied against income. Any post-Act losses can only offset 80% of the gains in future years.
In addition, the Act has eliminated the allowability of certain business expense deductions, including most entertainment and commuting benefits. The result is that tax exempt entities must record unrelated business income for amounts paid related to non-deductible qualified business expenses. These specifically relate to qualified transportation fringe benefits and/or qualified parking programs. Important decisions will need to be made with regard to these programs and their tax impact on the employee and/or the tax exempt entity.
Excise Tax on Compensation and Certain Endowment Funds
Effective for tax years beginning after December 31, 2017, the Act now imposes a 21% excise tax on compensation in excess of $1 million paid to certain covered employees. These covered employees include the five highest paid employees of the tax-exempt entity as of the preceding taxable year beginning after December 31, 2016.
Compensation will include all amounts treated as wages for federal income tax withholding purposes as well as any compensation for which there is no substantial risk of forfeiture. Of note: compensation to medical professionals is excluded from this excise tax (i.e., those providing direct medical care).
One new benefit to tax payers is a new provision allowing parents and other relatives to pay up to $10,000 annually (per child) for their children’s K-12 education through their 529 Plan. This was previously only available for college-level education. This will result in additional work for most schools in tracking and reporting these payments.
In addition, a 1.4% excise tax has been added to certain endowment funds held by private colleges and universities where the balance of assets exceeds certain thresholds.
The Act is complex with provisions that have the potential to impact not-for-profits significantly. We highly recommend planning now in order to ensure that your organization takes proactive steps to navigate both adverse and positive implications.
For more information, please contact;
Joseph Blatt, CPA, Partner
Aaron Shapiro, CPA
Director of Tax Services