What nonprofits need to know about final tax reform bill

December 17, 2017

Nonprofit Alert

Author(s): Michael J. Cooney, Anita L. Pelletier

The final text of the proposed Tax Cuts and Jobs Act was released on Friday. This alert discusses what changes were included that could affect nonprofits and other tax-exempt organizations as well as those provisions that were excluded.

The Republicans released the final text of the proposed Tax Cuts and Jobs Act (the “Bill”) on Friday, December 15, 2017. The Bill was negotiated by the House-Senate conference committee with a goal to present the Bill for a vote before the holidays.

The final Bill tracks the Senate proposal closely with a few additions from the House proposal as well. All provisions discussed below would still be effective for tax years beginning after December 31, 2017.

Charitable contributions

The Bill maintains many of the provisions that were included in both the House and Senate proposal including:

  • increase from 50% to 60% the income-based percentage limit described in section 170(b)(1)(A) for certain charitable contributions of cash to public charities and certain other organizations by an individual taxpayer,
  • removal of the “Pease limitation” on total itemized deductions (this provision sunsets in 2025),
  • repeal of any charitable deduction accompanying a payment to an institution of higher education in exchange for which the donor receives the right to purchase tickets or seating at an athletic event and
  • repeal of the mechanism to allow charities to satisfy the contemporaneous written acknowledgment requirement on behalf of their donors giving $250 or more.

Despite years of efforts towards repeal, the triumvirate of the estate tax, gift tax and generation skipping tax are maintained in the law, though the exemption amounts are doubled to shield more taxpayers and their estates.

It is important to recognize that robust charitable giving is a function of many provisions of the tax law, reflected in individual gift-giving decisions. Predicting the interplay of those provisions with any level of certainty is challenging, to say the least.

Unrelated business income tax

The final Bill includes several changes to the unrelated business income tax (UBIT) provisions in the tax code including:

  • disallowing losses from distinguishable unrelated business activities, and
  • taxation of certain fringe benefits provided to employees.

Left out of the final bill were the proposals that would impose UBIT on royalties received from licensing the organization’s name and logo, clarifying provisions relating to UBIT for quasi-governmental entities and clarifying language for UBIT on research income where the results are not made freely available to the general public.

Exempt organizations — excise taxes

The Bill maintains two provisions that will impose new excise taxes on exempt organizations including:

Executive compensation excise tax. The Bill includes a provision from both the House and Senate proposals for a 20% excise tax on the value of remuneration in excess of $1 million to certain employees. The final Bill adds references to definitions in existing tax code provisions.

Private college and university investment income.The 1.4% excise tax on the net investment income of certain private colleges and universities survives in the final Bill with the Senate threshold of $500,000 per student standard. The Bill includes a modified definition of an applicable educational institution as well as provisions that allow the IRS to promulgate regulations to implement this provision.

Left out of the final Bill were provisions modifying Code Section 4958 relating to rebuttable presumption of reasonableness requirements, simplification of the private foundation excise tax, addition of an excise tax on certain “private” art museums and an exclusion for certain private foundation excess business holdings.

Higher education

The House proposal in particular contained many provisions deleterious to students, many of which were abandoned. The proposal to tax the value of tuition relief for graduate students and university employees was dropped. The student loan interest deduction remains, but was adjusted with income limits. Further, forgiveness of student loan debt on account of death or disability will no longer be taxed as income.

Other notable exclusions

The final Bill does not contain the repeal of the so-called “Johnson Amendment” of 1954 in favor of religious organizations that conduct political activities. It also does not include the House proposal relating to additional restrictions on donor advised funds.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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