The most recent tax reform effort has drawn criticism on many fronts, and there are a number of troubling provisions that affect the exempt sector in particular. The Senate’s final bill passed early December 2, and the Senate and House now must resolve differences between the bills before sending the final product to President Trump. Below is a discussion of provisions that remain in the Senate bill, as well as a summary of provisions that didn’t survive lobbying and revisions (but potentially could re-emerge in the future).
Executive Compensation. For taxable years beginning after December 31, 2017, tax-exempt organizations will owe a 20 percent excise tax on total compensation exceeding $1 million paid to the five highest paid employees, and on “excess parachute payments” made to certain departing employees. This provision could impact organizations’ ability to attract top leadership talent. While it may seem logical to limit compensation at exempt organizations in order to put more money toward mission, larger exempt organizations may find mission is better accomplished when they have the flexibility to bring in the best person for the job and compensate them at a market rate.
Unrelated Business Income Taxation. Unrelated business income tax must now be calculated separately for each business activity; losses from one activity can no longer offset income from another. This is inconsistent with treatment in the for-profit sector, which may lead nonprofits to form taxable subsidiaries to be able to aggregate unrelated activities.
Excise Taxes. Private colleges and universities will owe a new 1.4 percent excise tax on their net investment income if the aggregate fair market value of their assets (other than those assets that are used directly in carrying out the institution’s exempt purpose) exceed $500,000 per student and certain other criteria are met. This tax arguably takes away funds that could go toward scholarships and other student aid. In addition, this tax will apply to all organizations under common control, meaning that the thresholds may be triggered more easily than is initially apparent.
Charitable Giving. Several provisions could have a negative impact on charitable giving and fundraising.
- The standard deduction has been nearly doubled, which would drastically reduce the number of people who opt to itemize deductions as it only makes sense to itemize if doing so would result in larger deduction. This, in turn, can reduce charitable giving.
- The estate tax will continue to exist under the Senate bill (the House has proposed repealing it), but doubling exemption levels to $11 million for an individual and $22 million for married taxpayers will mean that fewer individuals are subject to the tax. This also can reduce charitable giving, which typically is done at least in part as tax planning.
- The existing partial deduction for payments to a college or university for athletic tickets or seating rights has been repealed.
Education-Related Issues. Thankfully, the Senate bill preserves many education-related provisions that the House bill aimed to eliminate, including the following:
- Deductions for school supplies purchases by teachers (the Senate bill actually doubles the deductible amount to $500);
- Deductions for student loan interest;
- Non-taxable waivers, which the House bill aimed to include as taxable income.
Here is a summary of provisions that didn’t make it into final Senate bill, fortunately:
Unrelated Business Income Taxation. Exempt organization’s will not be taxed on the income derived from licensing names and logos, which was previously proposed. This continues with current treatment of this licensing as non-taxable royalties in most circumstances.
Political activity. The bill no longer includes language that would weaken the Johnson Amendment and allow for political statements by 501(c)(3) organizations in certain circumstances.
Intermediate Sanctions. Despite initial Senate efforts to rewrite the intermediate sanctions standard and expand its application, the final bill keeps intact the “rebuttable presumption of reasonableness” under the regulations. Further, the intermediate sanctions rules will not be expanded to cover Section 501(c)(5) and 501(c)(6) organizations; investment advisors and athletic coaches will not be treated as per se “disqualified persons;” and excise taxes will not be expanded to the exempt organization itself.
Tax-Exempt Bonds. Private activity bonds are not repealed entirely, as proposed by an earlier House bill. However, advance refunding bonds were repealed, which limits some refinancing opportunities.
Athletic Organizations. Professional sports leagues remain eligible for tax-exempt status.
As noted by the Colorado Nonprofit Association, there is still work to be done to monitor and make sure none of the above provisions are resurrected. The organization is offering a webinar on Wednesday on the tax bill.
Click here for commentary on the substance and procedure involved in the tax bill.