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The Tax Cuts and Jobs Act

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The Tax Cuts and Jobs Act (H.R. 1, “TCJA”) was signed in to law on December 22, 2017. Nonprofits are among the biggest losers under the new law. Below we will discuss the main provisions of the TCJA affecting nonprofits. Except where otherwise noted, these provisions take effect on January 1, 2018.

Fewer Taxpayers Will Benefit from Charitable Contributions

The TCJA retains the tax deduction for charitable contributions. In fact, it enables taxpayers to contribute more and take a deduction. Under prior law, taxpayers could not deduct more than 50% of their adjusted gross income in charitable contributions. The TCJA increases this limit to 60%, which will help wealthy donors to give more each year.

However, taxpayers may only deduct charitable contributions if they itemize their personal deductions instead of taking the standard deduction. If you don’t itemize, you get no deduction. In recent tax years about 30% of all taxpayers itemize. As you might expect, the higher a taxpayer’s income the more likely it is that he or she will itemize. Itemizers are far more likely to donate to charity than nonitemizers. 83% of itemizers report giving to charity compared with only 44% of nonitemizers. Non-itemizers contribute less than 20% of total charitable giving.

A taxpayer should itemize only if his or her personal deductions—such as charitable contributions, mortgage interest, property tax, medical expenses—exceed the applicable standard deduction. For 2017, the standard deduction was $6,350 for singles and $12,700 for marrieds filing jointly. The TCJA roughly doubles these amounts to $12,000 for singles and $24,000 for marrieds filing jointly. As a result, the Urban-Brookings Tax Policy Center estimates that less than 5% of taxpayers will itemize.

Last year there were 171.3 million personal tax returns filed with the IRS.  With 30% of taxpayers iteming their deductions, that equates to roughly 50.4 million itemizers.  If the Urban-Brookings Tax Policy estimates are correct, only 8.6 million returns will have itemized deductions in 2018 and forward.  The result is that there will be 41.8 million fewer tax units (and even more people, as some of these returns are for married filing jointly and represent two people) that will benefit financially from charitable contributions. 

Additionally, the TCJA reduces tax rates at most income levels, which lessens the tax benefit of making a charitable contribution by those who continue to itemize. For example, under the TCJA the top tax rate is 37%, instead of 39.6% under prior law. Thus, wealthy individuals who do itemize will save 2.9% less in tax by making contributions

A study by the Indiana University School of Philanthropy and Independent Sector concluded that changes such as these will reduce charitable giving by 1.7% to 4.6%. That’s an annual reduction between $4.9 and $13.1 billion. Others estimate the losses could amount to as much as $20 billion per year.

 

Fewer Charitable Bequests

The TCJA also reduces the number of taxpayers subject to the federal estate tax. Under the new law, estates worth up $11 million per person ($22 million per married couple) are exempt from the federal estate tax starting in 2018, double the amount in 2017. One of the main reasons wealthy individuals make charitable bequests in their wills is to help avoid estate taxes. Charitable bequests are not subject to this tax. Total bequest giving in 2016 was estimated at $30.36 billion, which amounted to 8% of total charitable giving. Doubling the estate tax exemption will likely reduce such charitable bequests in 2018 and later.

Tax-Exempt Advance Refunding Bonds and Tax Credit Bonds Eliminated

The TCJA completely eliminated tax-exempt advance refunding bonds and tax credit bonds issued after December 31, 2017.  There was no transitional relief offered.   Top tax-exempt bond lawyers say it’s likely that participants in the tax-exempt markets will turn to “synthetic” structures that attempt to mimic the economic effect of an advance refunding but that are not proscribed. In this regard, it won’t be surprising to see tax-exempt bonds issued with a make-whole call premium that is calculated to the call date, rather than final maturity, of the bond issue.  This modified make-whole premium would mirror the economic structure of an advance refunding issue but would be a current refunding in which the refunded bonds are called within 90 days after the refunding bonds are issued.

Also, while tax-exempt private activity bonds were not changed in the final version of the TCJA, many believe they may be on the chopping block in the future as House Republicans had extensive discussions about eliminating these bonds. 

More Nonprofits May Have to Pay UBIT

Tax-exempt nonprofits that operate businesses unrelated to their charitable mission must pay an unrelated business income tax (UBIT) on their net unrelated business income. Under prior law, a nonprofit that operated multiple unrelated businesses could deduct the losses from one business from the profits from another to determine the amount of net unrelated business income subject to UBIT. The TCJA requires that each business activity be siloed. Starting in 2018, each unrelated business must determine its net income without regard to losses from other unrelated businesses. As a result, it’s likely that more nonprofits will have to pay UBIT.

 

Excise Tax on High Nonprofit Compensation

Nonprofit employers will be subject to a 21% excise tax on compensation over $1 million for each of the five highest-paid employees of the nonprofit organization.  There is an exemption for compensation paid to licensed medical professionals for the performance of medical services. 

 

Changes for Colleges and Universities

The TCJA contains tax changes that adversely affect colleges and universities. Private colleges and universities with at least 500 students and endowments worth at least $500,000 per full-time student are subject to a 1.4% excise tax on their net investment income. Only colleges and universities with relatively large endowments are subject to this tax. For example, a college with 5,000 full-time students would only have to pay the tax if its endowment exceeded $2.5 billion.  In addition, donors will no longer be allowed to deduct as a charitable gift 80% of the cost of purchasing seat licenses to purchase tickets at college and university athletic events.

 

If you have any questions or concerns about how the Tax Cuts and Jobs Act will impact your organization please do not hesitate to call Stacy Cullen at 215-979-8873. 

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