12.19.17 | Churches & Denominations, Higher Education, Nonprofit Organizations, Nonprofit Tax | Email Alerts
Important Tax Reform Updates for Nonprofits
The Tax Cuts and Jobs Act (H.R. 1) reached a new stage on December 15, when the congressional conference committee approved the report of its agreement on the Act. This conference agreement combines elements of the versions of the bill previously passed by the House and Senate.print
The next stage is for the agreement to be voted on by the House and Senate, with no changes or amendments permitted. President Trump has indicated that he will sign the bill into law if it passes.
There are several elements of the conference agreement that nonprofit organizations should be aware of:
- Charitable contributions – The deduction limit would increase to 60% from the current 50% limit. The five-year carryover period would be retained to the extent that the contribution amount exceeds 60% of the donor’s adjusted gross income.
- Corporate tax rate – This would decrease to a new top rate of 21%, down from 35%.
- Political campaign activity – The Johnson Amendment, which restricts 501(c)(3) organizations from directly or indirectly participating in political campaign activities, remains unchanged. The House version of the bill had proposed allowing de minimis activity if it occurred within the ordinary course of the organization’s business and resulted in no more than de minimis incremental expenses.
- Section 529 educational plans and qualified expenses – Section 529 plans will be available for elementary and secondary school tuition. In addition, the definition of “educational expenses” would be modified to include certain expenses incurred for a home school:
- Curriculum and curricular materials
- Books or other instructional materials
- Online educational materials
- Tuition for tutoring or educational classes outside the home, provided the tutor or instructor is not related to the student
- Dual enrollment in a higher education institution
- Educational therapies for students with disabilities
- Unrelated business activities – Each unrelated business activity would stand alone with respect to profit or loss. Specifically, organizations that have more than one unrelated trade or business must first separately compute the unrelated business taxable income with respect to each unrelated trade or business and without regard to the specific $1,000 deduction. Losses resulting from one trade or business would not be permitted to offset income from another trade or business. There is a transition rule for net operating losses (NOLs) arising in a taxable year before January 1, 2018. Such NOLs that are carried forward to a future taxable year are not subject to this rule.
- Unrelated business income tax (UBIT) on certain fringe benefits – The conference agreement includes the provision in the House bill under which UBIT includes any expenses paid or incurred by a tax-exempt organization for the following, provided such amounts are not deductible under section 274:
- Qualified transportation fringe benefits,
- A parking facility used in connection with qualified parking, or
- Any on-premises athletic facility
- Excise tax on some private colleges and universities – The conference agreement includes a 1.4% excise tax on the net investment income (not yet defined) of private colleges and universities that are “applicable educational institutions” (AEIs). This will generally mean schools that have at least 500 students who pay tuition, with 50% of students located in the U.S. The threshold computation would be for AEIs whose aggregate fair market value of assets is at least $500,000 per student at the end of the preceding taxable year. (This would not include assets used directly in carrying out the institution’s exempt purpose)
- Excess compensation – There would be a 21% excise tax on compensation in excess of the $1 million paid by an applicable tax-exempt organization to one of its five highest-compensated employees when there is no substantial risk of forfeiture of the rights to such remuneration, as defined at I.R.C. section 457(f)(3)(B)C. This rule has several exemptions and limitations.
- Repeal of advanced refunding bonds – Both the House and Senate versions of the bill proposed taxing interest on advance refunding bonds (refunding bonds issued more than 90 days before the redemption of the refunded bonds). The conference bill adopted this measure. Interest on current refunding bonds would remain tax-exempt, and the provision would be effective for advance refunding bonds issued after 2017.
- Moving expenses – The conference bill includes provisions that would suspend the moving expense deduction and qualified moving expense reimbursements through 2025. There would be exclusions for active duty military members.
- Estate tax – The estate tax would be retained, with the exemption amount doubled. This would expire in 2026.
Note that many of the provisions of this bill would end on December 31, 2025. Be sure to consider the longevity of provisions when making any plans related to the potential new tax law.
Please contact our tax team with any questions or concerns about how this bill may affect your organization.