The Tax Cuts and Jobs Act was signed into law on December 22, 2017. While several provisions of the House Bill did not survive the negotiation process between the Senate and House versions of the bill, there are several sections of the new law that will have an impact on tax-exempt entities. All changes are effective for tax years beginning after 12/31/17.
- Fringe benefits provided to employees of tax-exempt entities that are deemed to be non-deductible must be added to the calculation of unrelated business income and taxed. Examples of these benefits are qualified transportation benefits, such as providing a car service, mass transit passes, parking allowances, etc.
- For tax-exempts with more than one unrelated business activity, each activity will need to be separately reported, and losses from one activity will not be able to offset income from another activity. Net operating losses (NOLs) from prior years can still be utilized to offset unrelated business income. However, there are new limitations on NOLs that are generated in tax years beginning after 12/31/17. This is a provision that will impact both taxable and tax-exempt entities by limiting the use of an NOL to apply to 80%, rather than 100%, of future income.
- A new 1.4% excise tax will be applied against investment income of private colleges and universities that have more than 500 students, with at least half of their tuition-paying students living in the United States, and at least $500,000 of assets per student. The assets will not include assets used directly in the operations of the college or university. However, the calculation will include all related entities.
- An excise tax of 21% will be applied to compensation in excess of $1 million paid to an exempt organization’s five highest-compensated employees, including payments to any employee that was in the top five in any prior tax year beginning after 2016. Compensation includes parachute payments and any remuneration other than payments to qualified retirement plans and tax-free fringe benefits. An exception was carved out in the final committee reports to exclude compensation paid to medical professionals for medical services performed.
There are several items within the new law that will impact both for-profit entities and tax-exempt entities. The overall reduction in the corporate tax rate is one of those items. Exempts that were previously paying tax at the highest corporate tax rate will now pay less tax. However, for exempt entities with unrelated business income under $75,000, they will pay more tax since the 15% bracket is gone. In addition to the reduction in the corporate tax rate, exempts will benefit from full expensing of qualified fixed asset purchases, which is effective for purchases made after September 27, 2017 and before January 1, 2023. The repeal of corporate alternative minimum tax is another item that would impact exempts that have unrelated business income or taxable affiliates. These are just a few of the provisions within the new law that could impact exempt entities with unrelated business income.
Charitable organizations will be happy to note that there are no significant changes to the rules regarding the deductibility of charitable contributions, other than an increase in the AGI limits regarding the total amount that can be deducted in one year. The limit is increased from 50% to 60% of adjusted gross income. However, the increase in the standard deduction for individuals filing joint returns, compounded by the limit in the deduction for state and local taxes, may cause individuals to make fewer charitable donations. Taxpayers over 70 ½ years old might opt to make charitable contributions directly from their Individual Retirement Accounts.
The new tax rules are complex, and there is much guidance needed to sort through all the intricacies of the new law. As always, we will keep you posted as new information arises. In the meantime, please contact your CSH advisor if you have any questions.