The new Tax Cuts and Jobs Act has made sweeping changes to the tax code, resulting in significant implications for nonprofits.
Signed into law on December 22, 2017, this Act is composed of over 1000 pages. To make things easier for your organization, we’ve summarized some key points that pertain to nonprofits. This is by no means an exhaustive list as there are so many details to learn about specific to your state and organization. Please consult your tax professional about the details of the Act and how to develop a strategy for addressing the impact it will have on your organization.
Tax Cuts and Jobs Act – Summary for Nonprofits
Standard Deduction Increased
For individuals the standard deduction increases from $6,350 to $12,000 and for married couples the deduction increases from $12,700 to $24,000.
Limit on State and Local Tax Deduction
Taxpayers now can only deduct $10,000 for state and local taxes
Charitable Deduction Limit Increased
Previously, taxpayers could only deduct up to 50% of their adjusted gross income (AGI). The new law increases this limit to 60%.
“Pease” Limitation Repealed
For high-income earners, this limit reduced the value of several itemized deductions to create more tax revenue. With the repeal of this limit, high-income earners now get the full benefit of these deductions.
Tickets to Athletic Events No Longer Deductible
Previously, donors who made a contribution to a college or university and received priority seating at athletic events could deduct 80% of the amount donated as a charitable contribution. Now these donations are considered a purchase of priority seating and cannot be deducted as donations to charity.
Excise Tax on Executive Compensation
This is one of the provisions of the new law that equalizes treatment between nonprofit organizations and for-profit companies. It imposes the same tax on nonprofit executive compensation as taxable corporations already pay: a 21% excise task on compensation that exceeds $1 million for covered employees.
Estate Tax Exemption Increased
Gift and estate tax exemptions went from $5 million to $10 million per individual.
Excise Tax on College and University Endowments
Educational institutions that meet certain criteria will be required to pay an excise tax of 1.4% on their net investment income, including the income and assets of related organizations. These criteria include:
- At least 500 tuition-paying students.
- Aggregate fair market value of assets (other than those used in directly carrying out the institution’s exempt purpose) of at least $500,000 per student.
- More than 50% of tuition-paying students are located in the U.S.
Modifications to the Unrelated Business Income Tax (UBIT)
- Nonprofits can no longer deduct the business losses of one economic activity from the gains of another economic activity. However, since the corporate tax was reduced from 35% to 21%, nonprofits will pay a lower tax on unrelated business income.
- Certain fringe benefits are no longer deductible, including employer costs for qualified transportation, parking facilities and onsite gyms. This is another provision that equalizes treatment between nonprofit and for-profit organizations.
Interest Income from Advance Refunding Bonds is Now Taxable
Previously, interest on a bond issued to advance refund another bond was excluded from gross income. Now this interest income is taxable.
What Wasn’t Included
There were several items that were discussed in committee but didn’t make it into the final Tax Cuts and Jobs Act. Among them are:
Repeal of the Johnson Amendment – One of the measures proposed in the House tax bill was to repeal the Johnson Amendment, which prohibits partisan politicking by 501(c)(3) organizations. The final version of the law does not change the Johnson Amendment—nonprofits are still protected from being politicized.
Universal Charitable Deduction – Another item discussed but not adopted is the idea of a universal charitable deduction, which would allow all taxpayers to deduct their charitable gifts, whether or not they itemize deductions.
What’s Next
Given the tight time frame for passing the tax bill, many details remain unclear. There is already talk of a technical corrections bill that will address some of these issues. In addition, separate bills have been introduced in both the House and the Senate proposing a universal charitable giving deduction. So watch for more changes to come.
As with all tax matters, it’s important to work with your tax professional to understand how this new tax law impacts your organization and to develop strategies to address these changes.
Click Here for More Resources: National Council of Nonprofits
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