The most sweeping tax reform law passed in decades, the Tax Cuts and Jobs Act of 2017 (TCJA), will affect all not-for-profits to a varying degree. With the start of a new year, it’s a good time to assess the changes the TCJA will have on your organization. There are four main changes to the tax code for not-for-profits exempt under IRS Code Section 501(c)3 and some changes that will effect exempt organizations indirectly. Unless noted otherwise, all changes are effective for tax years beginning after December 31, 2017.
Excise Tax on Private Colleges and Universities
A new 1.4% tax will be levied on the net investment income of private colleges and universities that meet the definition of an applicable educational institution. An applicable institution is one that in the preceding tax year had at least 500 students, had more than 50% of its students based in the U.S., was not a state college or university, and had assets in the aggregate fair market value of at least $500,000 per student (not including those used to directly carry out the institution’s exempt purpose).
UBIT Reporting
Unrelated business income tax (UBIT) must now be reported separately for each unrelated business. This means that organizations can no longer combine losses from separate businesses to achieve an overall net operating loss (NOL). One item to note here is that previous year NOLs will still be able to be used without regard to which business created them. Losses arising in 2018 and later years can, however, be carried forward to offset income from the same activity.
Fringe Benefits
Amounts paid by the organization as qualified transportation, parking or on-premises athletic facility fringe benefits to employees may now be considered unrelated business income. These include amounts paid for commuter transportation, transit passes, qualified parking and bicycle commuting reimbursement and on-premises athletic facilities that are used almost exclusively by employees and their families.
Excess Compensation
An excise tax of 21% will be levied for compensation paid to a “covered employee” in excess of $1 million per year. A covered employee is considered to be a current or former chief executive officer or one of the five highest paid officers of the organization for any tax year after December 31, 2016. Compensation paid also includes amounts not subject to substantial risk of forfeiture, so this may include pension and other deferred compensation amounts. There are, however, some exclusions as to what is considered compensation.
Estate and GST Exclusion Amount
The gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption amounts have been doubled to approximately $11.2 million per taxpayer. This increase could potentially lower the incentive for donors to make charitable bequests. Currently, this provision will sunset in 2025. (Read more on the estate tax impact in “Tax Reform Watch: The Impact on Your Estate Plan.”)
Standard Deduction
The new law also increases the standard deduction significantly. This change will reduce the ability of the majority of taxpayers to itemize on their tax returns, and, therefore, to receive a tax deduction for their charitable contributions. Donors may be encouraged to bunch deductions or leverage contributions through the use of a donor advised fund. Overall this may lead to more sporadic donations to non-profits and in turn, make future planning and budgeting more difficult.
Cash Contributions
For taxpayers who are able to itemize, the limitation for cash contributions was increased from 50% to 60% of adjusted gross income (AGI). The Pease limitation, which set a ceiling on itemized deductions for some taxpayers with AGI over certain thresholds, was repealed — giving those who are able to itemize further incentive to make charitable contributions. Also, payments made for priority seating at college athletic events will no longer be considered a charitable deduction.
As fiduciaries of your not-for-profit organization, board members and executive officers need to take the initiative to understand the new tax law. It is important to identify the impact these changes will have, both from a tax filing perspective to understand any new tax liabilities, and from a budgeting perspective to proactively manage any changes in funding in the coming years.
Please contact a member of your service team, or contact Marie Brilmyer at mbrilmyer@cohencpa.com for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.