President Trump signed the Republican tax reform bill into law on December 22. The enactment of this legislation provides the first major tax reform in over 30 years and will have a far-reaching effect on corporate and individual taxpayers, as well as on exempt organizations. While the final legislation omitted several proposals that would have adversely impacted educational institutions, their employees, and their students, the final legislation does include some provisions that will have a significant effect, as discussed below.
The tax reform legislation includes a provision that organizations carrying on more than one unrelated trade or business will be required to separately calculate unrelated business taxable income (UBTI) for each unrelated business. This change will effectively prohibit using deductions that relate to one unrelated business to offset income of a different unrelated business. However, an organization will be able to use an excess deduction from one taxable year to offset income from the same unrelated business activity in another taxable year. This change applies to tax years beginning after 2017. Under a special transition rule, net operating losses arising in a taxable year beginning before January 1, 2018 that are carried forward to a taxable year beginning on or after that date are not subject to this provision.
The legislation increases UBTI by the value of certain fringe benefits provided to employees, such as qualified transportation fringe benefits, qualified parking fringe benefits and use of on-premises athletic facilities. This is effective for amounts paid or incurred after 2017.
While the legislation does not include the provision that was in the House bill that would tax the interest on private activity bonds issued after 2017, the final legislation repeals advance refunding bonds after 2017.
The tax reform legislation increases the standard deduction beginning in 2018, which is expected to result in fewer taxpayers taking itemized deductions. This will lessen the tax effect of charitable contributions for many individuals. All section 501(c)(3) non-profit organizations could see a drop in charitable contributions due to this provision.
There is an increase in the estate and gift tax credit exclusion to $10 million effective after 2017 and before 2026. The final legislation does not provide for a repeal of the estate tax at any point in the future. As with the increase in the standard deduction, the increase of the federal estate and gift tax unified credit exclusion amount is also expected to result in a decrease in charitable contributions to non-profit organizations.
The final legislation repeals the current 80% deduction for contributions made for college and university athletic seating rights. The repeal is effective for contributions made after 2017.
The legislation imposes a 21% excise tax on the sum of 1) compensation (other than an excess parachute payment) in excess of $1 million paid to a covered employee and 2) any excess parachute payment paid to a covered employee. A covered employee is defined as an employee (including any former employee) who is one of the five highest compensated employees of the organization for the taxable year, or was a covered employee for any preceding taxable year beginning after 2016. For purposes of this provision, an excess parachute payment is the amount by which a parachute payment exceeds the base amount allocated to it. The base amount is the average annual compensation of the employee for the five tax years before the employee’s separation from employment. If applicable, the employer is liable for this excise tax. This provision applies to tax years beginning after 2017.
A 1.4% excise tax on certain private colleges and universities and their related organizations has been retained in the final legislation. The excise tax applies to private institutions that have more than 500 students and assets of at least $500,000 per full-time student. The number of students at an institution for purposes of applying the excise tax is based on the daily average number of full-time (or full-time equivalent) students attending. This provision is effective for tax years beginning after 2017.
Another provision that was retained in the final tax reform legislation provides that elementary and secondary school expenses of up to $10,000 per year will be considered qualified expenses for Section 529 plans. This provision applies to distributions made after 2017.
We at BlumShapiro are monitoring developments for further guidance from Congress and the IRS on the above tax reform legislation provisions, and will provide updated information and analysis as necessary.