The 2017 Tax Cuts & Jobs Act will have a significant impact on individuals, businesses and nonprofits, but the latter may experience the most negative effects.
There are specific provisions in the TCJA that will likely affect nonprofits’ bottom line in 2018 and beyond. It is critical that nonprofits study these provisions and take proper steps to counter any adverse effects from the act.
The TCJA increases the standard deduction for individuals from $6,350 to $12,000 and for married couples filing jointly from $12,700 to $24,000. For taxpayers who itemize, the TCJA caps the deduction for state and local taxes at $10,000, which is likely to increase the federal income tax burden of taxpayers in high-income and high property tax jurisdictions.
The significantly increased standard deduction coupled with the cap on the state and local tax deduction may result in more taxpayers taking the standard deduction in lieu of itemizing.
For taxpayers who itemize, the TCJA increases the contribution limit from 50 percent to 60 percent of adjusted gross income. In addition, the “Pease” limitation (an exemption phase-out named for former Rep. Donald Pease) has been repealed, which will enable high-income taxpayers to reap the full benefit of their charitable contributions. Though the TCJA may reduce the amount of contributions received from taxpayers who do not itemize (and who do not generally make large charitable donations), it may incentivize high-income, itemizing taxpayers to give more.
The TCJA modifies several unrelated business taxable income (UBTI) and excise tax provisions applicable to nonprofits.
Nonprofits are generally subject to tax with respect to their UBTI. An activity is considered an unrelated business, and thus subject to UBTI, if it meets the following requirements: It is a trade or business, it is regularly carried on, and it is not substantially related to furthering the exempt purpose of the organization.
Under the TCJA, nonprofits can no longer exclude from UBTI those amounts used to provide certain fringe benefits to employees, such as parking and transportation.
In addition, nonprofits cannot net the income from one unrelated business against the losses from another unrelated business. Instead, the UBTI from each unrelated business must be separately calculated.
Finally, the TCJA imposes a 21 percent excise tax (equal to the corporate tax rate) on compensation in excess of $1 million paid to a “covered employee.” A “covered employee” is a current or former employee of the nonprofit who is either one of the nonprofit’s five highest compensated employees for the tax year or was a “covered employee” of the nonprofit, or its predecessor, for any tax year after Dec. 31, 2016.
The same excise tax applies to excess parachute payments to nonprofit employees whose compensation is $120,000 or more. However, compensation paid to licensed medical professionals is excluded from the excise tax.
Colleges and universities frequently require a monetary contribution for the right to purchase tickets to sporting events or upgrade to better seats. This can be substantial if you are a fan of an SEC or other athletically strong school. Previously, the law allowed donors to deduct 80 percent of such contributions, but under the TCJA no deduction is allowed for such contributions.
For tax years prior to 2018, private colleges and universities were not subject to net investment income tax. However, the TCJA imposes a 1.4 percent excise tax on the net investment income of a private college or university that has more than 500 tuition-paying students, 50 percent of whose tuition-paying students live in the United States and at least $500,000 of assets per full-time student, excluding assets related to and used in carrying out the school’s educational purposes.
To determine if the excise tax applies to a private college or university, the assets and net investment income of the school and its “related organizations” must be taken into account. A “related organization” is an organization that controls or is controlled by the private college or university (such as a hospital), is controlled by one or more persons who control the private college or university, or is a supported or a supporting organization during the year with respect to the private college or university.
Katie Watson Bingham is an associate in the Trust and Estate Planning Practice Group and holds a master’s degree in taxation from the University of Florida. Her areas of practice include estate planning, estate and trust administration, estate and gift taxation, tax planning for individuals, entity formation, probate matters and formation and planning for exempt organizations.