On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA). Among the changes to significantly impact not-for-profit organizations, tax rates have been cut, the standard deduction has been doubled, and personal exemptions have been eliminated. With the standard deduction going up, the number of taxpayers who itemize (and are eligible to deduct charitable contributions) is estimated by the Tax Policy Center to drop from 37% in 2017 to 16% in 2018. To put a dollar sign on the impact to individual charitable giving, it is estimated to decline between $12 and $20 billion in 2018, with similar effects in the years after. Justifiably, a lot of nonprofits are worried about how these changes will affect them, and there are some things they should take into consideration.
From the Donor Perspective
The TCJA will increase the estate tax exemption to $10 million, which will be indexed for inflation through 2025, eliminating the need for individuals to make charitable contributions to eliminate potential estate tax. The increase in estate exemption is estimated to lower charitable giving by $4 billion per year, though some experts argue that having more disposable income will encourage wealthy individuals to give more. After all, not everyone looks at philanthropy as part of their tax planning. Nevertheless, not-for-profits should keep this information in mind when planning their fundraising strategies going forward.
Changes to Unrelated Business Income Tax (UBIT)
In prior years organizations with several UBI activities were able to aggregate them and offset income from profitable ones and expenses from the ones with losses. TCJA requires organizations to calculate activities separately, which may result in a higher tax liability. Organizations will, however, be able to offset losses from recurring annual activities if the losses incurred in a prior year are greater than the profits earned in the current year. The Act also increases UBI by adding back certain fringe benefits; for example, transportation-related expenses, even if paid through an employee’s pre-tax salary reduction. Keep in mind that for tax years beginning after December 31, 2017, the tax rate has been lowered from 35% to 21%. Good practice for any organization would be to make sure they separate income and expenses allocated to various activities to help with estimating potential tax liability.
New Tax on excess executive compensation
According to the Wall Street Journal, about 2,700 U.S. not-for-profit employees were each paid more than $1 million in 2014. Under new tax law, any organization providing more than $1 million in compensation, including benefits, will face a 21% excise tax. Tax also applies to certain large payments made to individual employees upon separation from the organization, commonly known as “parachute” payments. Those payments do not have to exceed $1 million to be subject to tax. This provision was put into law to bring the salaries of the executives of tax-exempt organizations more in line with those of for-profit organizations, and is projected to generate about $1.8 billion in tax revenue.
No More Bond Interest Exemption
Beginning December 31, 2017, nonprofit organizations will no longer have tax-exempt treatment for interest paid on tax-exempt bonds issued to repay another bond in advance. Bonds issued before that date will remain tax-exempt.
There are certainly a lot of changes and uncertainties with the new law. Need help? Contact us to assist with your any questions.