Top Tax Changes for Nonprofits and Education in the New Tax Bill

Sweeping tax reform has been enacted with most provisions being effective for years beginning after December 31, 2017. This means calendar year taxpayers have mere days to take action, where possible, to mitigate the effects the new law may have on them in 2018. Several provisions affect exempt organizations directly, while other provisions will be felt through the impacts the new tax law has on donors and employees.

The legislation is complex and will likely need interpretation, since we aren’t sure how long we’ll have to go without official guidance from the IRS. For a quick rundown of what did and didn’t make it into the final bill the president signed, check out these highlights of the Tax Cuts & Jobs Act specifically for nonprofit entities and educational institutions.

New Items Affecting Donors

  1. Increased AGI percentage limit for contributions of cash to public charities from 50 percent to 60 percent
  2. Denial of a charitable deduction for payments made in exchange for college athletic event seating rights
  3. Estate tax exemption increased from $5.49 million to $10 million through 2025 (indexed for inflation)
  4. Increased standard deduction and changes to allowable itemized deductions mean that not all donors will receive a tax benefit from charitable contributions

New Items Affecting Exempt Organizations with Employees

  1. NFP employer is liable for an excise tax equal to 21 percent of compensation (excluding any excess parachute payments) in excess of $1 million paid to any of its five highest compensated employees (including amounts paid directly by the organization as well as its related organizations)
  2. NFP employer is liable for an excise tax equal to 21 percent of any excess parachute payment provided to a covered employee (in other words, one of five of the highest compensated employees meeting section 414(q) definition but excluding licensed medical professionals)
  3. Unrelated business taxable income (“UBTI”) will include any expenses paid by an NFP for qualified transportation fringe benefits, a parking facility used in connection with qualified parking or any on-premises athletic facility (to the extent such amounts are not deductible under section 274)

New Items Affecting Calculation of Unrelated Business Taxable Income

  1. Corporate graduated tax rate structure eliminated and instead tax rate will be 21 percent
  2. Net operating loss (“NOL”) deduction limited to 80 percent of taxable income (losses arising in taxable years beginning after December 31, 2017)
  3. Repeal of two-year carryback for NOL deductions and establishment of an indefinite carryover period (i.e., no longer limited to 20 years)
  4. Requirement that NFPs calculate UBTI with respect to each unrelated trade or business separately – losses from one activity will not be allowed to offset income from another activity
  5. NOL deductions will also be tracked by trade or business activity in a similar manner (effective for taxable years beginning after December 31, 2017, but NOLs arising in years beginning prior to January 1, 2018, will not be subject to this new provision)

Other New Items Affecting Exempt Organizations

  1. Repeal of exclusion from gross income for interest on a bond issued to advance refund another bond
  2. Termination of tax-credit bonds and direct-pay bonds (affects mostly governmental entities)
  3. Imposition of 1.4 percent excise tax on net investment income of applicable educational institutions
    1. State colleges and universities excluded
    2. Institution must have at least 500 students
    3. More than 50 percent of the students must be located in the United States
    4. Institution (combined with its related organizations) must have assets (other than exempt-use assets) of $500,000 per student

Previously Proposed Items Not in Final Signed Bill

  1. Repeal of exclusion for qualified tuition reductions provided to employees (and their spouses and dependents) from gross income and wages
  2. Charitable standard mileage rate to be adjusted for inflation
  3. Limitation on exclusion for employer-provided housing for employees (and their spouses and dependents)
  4. Termination of new markets tax credit
  5. Termination of private-activity bonds
  6. No tax-exempt bonds for the construction of professional stadiums
  7. Modification to the exclusion of income (from UBTI) earned from research performed by an organization operated primarily for purposes of carrying on research made available to the general public for that portion of income earned from research that was not made available to the public
  8. Simplification of excise tax on net investment income for private foundations to 1.4 percent (versus 1 percent or 2 percent)
  9. An organization operating an art museum as a substantial activity will only qualify as a privately operating foundation if the museum is open during normal business hours to the public for at least 1,000 hours during the year
  10. Exclusion from the definition of excess business holdings for certain philanthropic business holdings (i.e., “Newman’s Own” exception)
  11. Modification to allow certain political campaign activity to be conducted by 501(c)(3) organizations
  12. Additional reporting requirements for donor-advised funds on Form 990

Next Action Steps

If figuring out the effects of the new law seems difficult, just know you’re not alone. We’re all in this together, trying to make the right interpretations of these new provisions. We will work to help you get the most out of the changes.

When questions pop into your head as you review these items and think about the impacts to your organization, reach out to Amanda M. Adams, CPA, National Leader of Nonprofit Tax Services, just to start the conversation and get some initial guidance. If you get even one new idea from the conversation, it will have been worth your time.