The first draft of the Tax Cuts and Jobs Act was released yesterday. For folks who really know how to have a good time on the weekends, you can find the full text of the bill here. For others who may be interested to see what this draft may have in store for the nonprofit/exempt organization sector but know their eyes would start crossing by the second page — read a focused summary instead.
Now we know that there will be plenty of changes as this bill moves through, so this is just our starting point. It could get better, or it could get worse. I have tried to cover at a high level some of the impact of this legislation – but I know I am missing plenty.
Provisions I will be watching the most:
- Proposed amendment to the “Johnson Amendment” – We knew something like this was coming. See my blog post on the Johnson Amendment from September. The language currently included in the bill would allow churches and their integrated auxiliaries to make statements in favor or opposition to a candidate as long as it is in the normal course of the organization’s religious services or gatherings and results in no more than a de minimis expense. As discussed in my prior blog, there is a very real concern that this would be hard to monitor (churches are exempt from 990 filing requirements) and may result in more funds directed towards churches to influence their endorsements. Individuals much smarter than me have suggested that, as currently written, this provision would be subject to constitutional challenge. Very conservative elected officials indicate that this provision doesn’t yet go far enough. Make sure your elected officials know that any attempt to weaken restrictions on political speech by 501(c)(3)s negatively affects the entire sector.
- Proposed excise tax on investment income earned by private colleges and universities — 1.4% tax on the net investment income on the endowments of private colleges and universities that have at least 500 students and endowments equal to at least $100k/student. This is equivalent to the proposed changes for private foundations and is not shocking — huge endowments have been under attack for awhile. Seems fair.
- Proposed excise tax on executive compensation > $1million – Organizations that pay any of their five highest-paid executives > $1million will be subject to a 20% excise tax on the excess. Seems fair to me.
- Proposed elimination of a deduction for certain benefits to employees, including transportation fringe benefits, certain parking benefits, access to on-premises gyms, and other similar benefits. Since exempt organizations don’t need/use the deduction, they will instead have their unrelated business taxable income increased by these amounts. Disappointing, but can probably be somewhat offset by a raise?
- Proposed increases to credits that can be used to reduce an estate’s tax and eventual repeal of the estate and generation-skipping taxes. This will likely result in significantly less charitable giving (estates won’t need the charitable deduction to reduce tax and can just pass on estate to beneficiaries.
- Proposed increased standard deduction and elimination of personal exemptions – the concern by many is that this increase will eliminate for some the need to itemize, and thus one of the incentives for charitable giving.
- Proposed limitation on the Section 119 exclusion for housing provided for the convenience of the employer and employees of educational institutions — exclusion would be capped at $50k ($25k for married individual filing a joint return) and would phase out for higher-income individuals. Seems fair.
Other provisions affecting the sector directly or indirectly:
- Increase in the percentage of deduction available from adjusted gross income to 60% for certain charitable contributions.
- Elimination of charitable deduction for contributions resulting in a right to purchase tickets for athletic events.
- Charitable mileage rate adjusted for inflation.
- Extending unrelated business income tax to certain organizations exempt under Section 115 (government-related entities).
- Limitations on the ability to exclude from unrelated business taxable income from research activities.
- Flat 1.4% excise tax on private foundation net investment income (simplification, not an additional tax).
- Limitations regarding qualification for private operating foundation status for certain art museums.
- Exception from private foundation excess business holdings tax for certain philanthropic business holdings.
- Requirement that donor advised funds annually disclose policies on inactive donor advised funds and average amount of grants made.
- Repeal of New Markets Tax Credit.
Stay tuned for updates!