Recent Tax Developments for Tax-Exempt Organizations
Recent tax changes found in the Tax Cuts and Jobs Act (“TCJA”) and Bipartisan Budget Act of 2018 will affect tax-exempt organizations. Those changes are summarized as follows:
Increased Standard Deduction for Individuals. The opportunity to deduct charitable contributions is limited by the TCJA. Donors can deduct the greater of their “itemized” deductions (which includes charitable contributions) or the “standard deduction.” The new law increases the standard deduction to $24,000 (previously $12,700) for married couples filing jointly and $12,000 (previously $6,350) for single filers. In order for donors to be able to deduct charitable contributions, the donor’s itemized deductions (which generally includes charitable contributions, state and local taxes up to $10,000, and mortgage interest) must now exceed the standard deduction. Because of the significant increase in the standard deduction, the new law might negatively impact charitable contributions.
Excess Compensation Excise Tax. The TCJA imposes an excise tax of 21% on compensation amounts paid by tax-exempt organizations in excess of $1 million, including 457(f) deferred compensation and excess separation amounts to covered employees. A covered employee is an employee or former employee who is one of the five highest compensated employees of the organization. An exemption is provided for the performance of some medical or veterinarian services. The provision is effective for years beginning after 2017.
Private College Endowment Tax. Private colleges and universities with $500,000 of endowment assets per student, with at least 500 full-time students will be subject to a 1.4% excess tax on net investment income. This provision is effective for years beginning 2017.
Segmentation of Unrelated Trade or Business Activities. If a tax-exempt organization has two or more unrelated businesses, unrelated business taxable income (“UBTI”) will now be computed separately with respect to each unrelated business. An organization’s UBTI for a year would be the sum of the amounts computed for each separate unrelated business, rather than allowing “netting” of UBTI items as was previously the case. This provision will take effect for years beginning after 2017 and presents difficult questions about what items must be computed separately. The IRS has begun the process of establishing guidance on this issue, but as of this date, none has been issued. On the bright side of UBTI, the top corporate tax rate for unrelated business income is now 21%. This provision will be in effect for years after 2017.
Fringe Benefits as UBTI. The TCJA provides that certain fringe benefits which are not deductible under the TCJA (such as qualified transportation fringe benefit expenses) increase income subject to UBTI. If a tax-exempt employer provides cash to its employees for parking or metro passes on a pre-tax basis, the IRS has stated that those amounts will increase UBTI rather than being classified as additional compensation to the employee. Many organizations will be required to file Form 990-T to report this UBTI. This provision is effective for years beginning after 2017.
Local Lobbying Expenses not Allowed. The deduction for local lobbying expenses is no longer allowed. The change will especially affect 501(c)(6) trade associations. This change is effective with respect to amounts paid or incurred after December 22, 2017.
ABLE Account Changes. The contribution limits for ABLE accounts are increased under certain circumstances. In addition, amounts from 529 accounts can now be rolled over to ABLE accounts, without penalty, under certain circumstances. This provision is effective for distributions after the date of enactment.
Expanded Use of 529 Accounts. Families can now use 529 plan funds to pay for tuition for private elementary and secondary education, not just for college tuition.
Expanded Contribution Limit for Public Charity Contributions. The annual limit on cash contributions to public charities is increased to 60% of adjusted gross income, rather than 50%. This provision is effective for years after 2017 and sunsets before 2026.
Elimination of Deduction for College Seating Rights. Under pre-TCJA law, payers who received the right to purchase tickets or seats at an athletic event as part of the payment to a college or university could treat 80% of the payment as a charitable contribution if certain conditions were satisfied. This provision has been eliminated with respect to contributions made after 2017.
“Newman’s Own” Exception to Excess Business Holdings Rule. The Bipartisan Budget Act now provides an exception to the excess business holdings prohibition for private foundations for certain wholly-owned for-profit businesses.