Here is a look at some of the more important elements of the Tax Cuts and Jobs Act that have an impact on tax-exempt organizations. In general, the provisions involved are effective starting in 2018.
Unrelated Business Taxable Income (“UBTI”) will change certain tax-free benefits to taxable. Those benefits include:
- Qualified Transportation Fringe Benefits: These are expenses paid by the organization. These include bus passes, van pools, parking passes/reimbursements, and bicycle commuting reimbursements.
- Employee Parking paid by the organization.
- On-Premises Athletic Facility associated with the organization.
The tax-exempt organization has two options starting on January 1, 2018. The above benefits can be included as taxable income on the employee’s Form W-2, or the organization can elect to pay tax on these benefits by filing a Form 990-T and pay the corporate tax rate of 21% on the benefits.
New Excise Tax on High Nonprofit Compensation will be required on annual compensation of $1 million or more paid to any top five highest employees for earnings over $1 million. The excise tax is 21% of the earnings.
Excise Tax on Private College’s Investment Income will be subject to a new excise tax. The excise tax rate is 1.4% of the organization’s net investment income. It applies only to private colleges and universities with at least 500 students with assets of at least $500,000 per student. For purposes of this excise tax, net investment income is the institutions gross investment income minus expenses incurred to produce it.
Charitable Contributions have the potential of changing due to the TCJA. The TCJA does retain the tax deduction for charitable contributions, which has been part of the tax code for almost 100 years. Prior to January 1, 2018, a taxpayer could donate up to 50% of their adjusted gross income to a nonprofit organization. The TCJA increases this limit to 60%, which will help wealthy donors to give more each year.
The TCJA adjusted the tax rates and raised the standard deduction from $6,350 for singles and $12,700 for marrieds filing jointly to $12,000 for singles and $24,000 for marrieds filing jointly. This change almost doubles the standard deductions. In 2017, approximately 30% of taxpayers itemized but with the change in the standard deduction, the amount could drop to less than 5% of itemizers. Non-itemizers contribute less than 20% of total charitable giving.
The TCJA will likely shift contributors from low- and moderate-income taxpayers to a relatively small number of mega-donors, a trend that makes the non-profit organizations very uncomfortable. The shift
will create winners and losers among the non-profit organizations. If the donors shrink in numbers, the shift will likely provide a decrease in the amount of smaller social services agencies and religious
organizations that receive those donations. Without the small givers, nonprofits are worried about where the next generation of donors will come from.
Because of the reduction of donors, it becomes more important for the nonprofits to concentrate on relationships with their donor base. This will assist them in donor retention. It will push the nonprofits to set up the infrastructure to allow the donors to stay engaged and connected to the charities that mean the most to them.