Tax Cuts and Jobs Act for Nonprofits
Posted on Wednesday, January 10, 2018 Share
Below is a summary of key provisions of the 2017 Tax Cuts and Job Act that impacts nonprofit organizations.
Standard Deduction Increased
Adjusted gross income (AGI) on Form 1040 is reduced by the standard deduction or the sum of itemized deductions to determine taxable income. The standard deduction amounts for 2018 were scheduled to be $6,500 for single individuals and married individuals filed separately, $9,550 for heads of households and $13,000 for married individuals filed jointly. Under the new tax law, the standard deduction for tax years beginning after December 31, 2017 and before January 1, 2026 (2018-2025), has been increased to $24,000 for married individuals filing a joint return, $18,000 for head of households and $12,000 for all other taxpayers.
As a result, more taxpayers are likely to utilize the standard deduction instead of itemized deductions. Unfortunately, charitable donations to nonprofit organizations are included as itemized deductions. With the increase in the standard deduction, donations to nonprofit organizations may decrease since many taxpayers will no longer receive a tax deduction for the contribution.
Charitable Contribution Deduction Limitation Increased
Individual taxpayers may take a charitable contribution deduction (itemized deduction) for contributions made to a charitable organization. The deduction is limited to a percentage of the taxpayer’s contribution base, which was 50%, 30% or 20% of the taxpayer’s adjusted gross income depending on the type of organization and contribution. The 50% limitation applied to public charities and certain private foundations. Under the new tax law, the 50% limitation has been increased to 60% for contributions made in tax years beginning after December 31, 2017 and before January 1, 2026 (2018-2025).
As a result, taxpayers that still benefit from itemized deductions may increase their contribution due to the increased percentage.
College Athletic Seating Rights
Individuals making payments to higher education institutions for the right to purchase tickets or seating at an athletic event could treat 80% of the payment as a charitable contribution when (1) the amount was paid to or for the benefit of a higher education institution and (2) such amount would be allowable as a charitable deduction but for the fact that the individual receives as a result of the payment the right to purchase tickets. Under the new tax law, no charitable deduction will be allowed for any payment to a higher education institution in exchange for the right to purchase tickets or seating at an athletic event starting in tax years beginning after December 31, 2017.
As a result, there may be a decline in athletic revenue for higher education institutions.
Reduced Corporate Tax Rates
Corporations are subject to graduated tax rates of 15%, 25%, 34% and 35%. Under the new tax law, the corporate tax rate is a flat 21% rate for tax years beginning after December 31,2017.
As a result, nonprofits with unrelated business income which is taxed at the corporate tax rate may see either an increase or decrease in unrelated business income tax depending on the amount of unrelated business income.
Excise Tax on Excess Executive Compensation
Compensation paid to nonprofit executives has to be fair and reasonable. Nonprofits are not allowed to participate in private inurement, which can include excessive compensation. The new tax law specifically includes excise taxes at the corporate tax rate of 21% on the sum of (1) the remuneration (other than then an excess parachute payment) in excess of $1 million paid to a covered employee by an applicable tax-exempt organization for the year and (2) any excess parachute payment paid by the applicable tax-exempt organization to a covered employee for tax years beginning after December 31, 2017.
As a result, larger nonprofits paying significant salaries may be subject to excise taxes.
Excise Tax on Investment Income of Private Colleges and Universities
Private colleges and universities are normally treated as public charities, not private charities, and therefore are not subject to excise tax on net investment income as private foundations are. The new tax law requires an excise tax of 1.4% on net investment income for tax years beginning after December 31, 2017. The excise tax applies only to private colleges and universities with at least 500 tuition-paying students, more than 50% of the tuition paying students located in the United States and with at least $500,000 of assets per student.
As a result, colleges and universities with large endowments may be required to pay excise taxes on net investment income.
Separately Computed UBIT
A nonprofit that has multiple unrelated business income activities, aggregates total income from all activities and subtracts the total deductions from all activities. Under the new tax law, gains and losses from each unrelated activity have to be calculated separately. For tax years beginning after December 31, 2017, losses from one activity cannot offset income of another activity.
As a result, total deductions cannot reduce total income and nonprofits may owe more unrelated business income tax.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
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