The New Tax Bill: Changes Affecting Tax-Exempt Organizations

Congress has passed a sweeping new tax bill, which will be effective in 2018. Tax-exempt organizations, like their for-profit counterparts and individuals, will be affected by changes in the bill, including the following notable changes:

Increased Standard Deduction. The standard deduction for individuals will nearly double under the new legislation, which is expected to dramatically decrease the number of taxpayers who itemize deductions. Though this does not directly impact tax-exempt organizations, many in the nonprofit sector have expressed concern that donors may be less incentivized to make charitable contributions if they do not itemize deductions. The bill also increases the charitable deduction limit from 50 percent to 60 percent of adjusted gross income, however, so donors in the highest income brackets may be incentivized to give more.

Highly Compensated Employees. The bill will impose a 21 percent excise tax on a tax-exempt organization for compensation from the organization and related organizations exceeding $1 million for each of the top five highest compensated employees and executives and on excess parachute payments (certain employee severance payments). The bill does not exempt existing compensation arrangements from this provision. Importantly, however, this excise tax does not apply to compensation for services performed by duly ordained, commissioned, or licensed ministers of a church in the exercise of their ministry.

Unrelated Business Income Activities. The bill will require unrelated business income (UBI) activities to be computed and taxed separately, therefore eliminating an organization’s ability to offset gains from one activity with losses from another activity. However, unrelated business income will be taxed at the decreased corporate income tax rate, which may benefit some organizations with UBI.

Fringe Benefits to Increase UBI. The bill will increase UBI by the amount paid or incurred by a tax-exempt organization for certain qualified transportation fringe benefits, parking facilities, or on-premises athletic facilities. However, this does not apply to amounts paid or incurred in direct connection with an unrelated trade or business regularly carried on by the organization.

The following proposed changes were NOT included in the final version of the bill:

The Johnson Amendment. Proposed changes would have eased or eliminated the prohibition on political activity by 501(c)(3) organizations, but the changes did not make it into the final bill.

Tax-Exempt Bonds. The bill does not change tax-exempt organizations’ ability to use tax-exempt bonds as a financing tool to fund building projects. However, the bill does remove provisions permitting advance refunding of the bonds, potentially making it more difficult for bondholders to obtain refinancing.

Intermediate Sanctions Act. Far-reaching proposed changes to the Intermediate Sanctions Act are not included in the final bill, but the bill will impose a 21 percent excise tax on certain remuneration of highly compensated employees, as described above.

Private Foundations. Proposed changes to private foundation excise tax rates on investment income do not appear in the final bill.

Donor advised funds. A proposal to regulate donor advised funds with new disclosure requirements is not included in the bill.

As with all laws affecting tax-exempt organizations, the tax bill’s application will vary depending on specific circumstances. Please contact us if you have any questions about the effect of the new tax bill on your organization.

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