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. The final legislation includes several provisions that will have a significant effect on exempt organizations, as discussed below.
The tax reform legislation includes a provision that exempt 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.
For trust entities, the top tax rate on UBTI decreases from 39.6% to 37%. For corporate entities, the corporate tax rate will be a flat 21%. In addition, the alternative minimum tax has been repealed for corporate entities. These changes are effective for tax years beginning 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 charitable non-profit organizations.
The final legislation repeals the 80% deduction for contributions made for college and university athletic seating rights. The repeal is effective for contributions made after 2017.
Under the 2017 tax rules, the deduction for cash gifts from individuals to public charities and certain private foundations was limited to 50% of the taxpayer’s adjusted gross income (AGI). The tax reform legislation provides that for cash contributions made after December 31, 2017 and before January 1, 2026 to public charities and certain private foundations, the AGI limitation increases from 50% to 60%. Contributions exceeding the AGI limitation can be carried forward and deducted for up to five years, subject to the later year’s AGI limitation.
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 by an exempt organization. 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. A parachute payment is defined as a compensation payment to a covered employee if the payment is contingent on the employee’s separation from employment, and the aggregate present value of all such payments equals or exceeds three times the base amount. 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.
For tax years 2018 through 2025, the tax reform legislation temporarily suspends the exclusion from income of qualified moving expense reimbursements. Therefore, any qualified moving expense reimbursements paid or incurred during the suspension period must be included in the employee’s taxable income. This provision of the tax reform legislation may result in an employer agreeing to provide a tax gross-up on a qualified moving expense reimbursement in order to attract high-level employees. Exempt organizations should be aware that a tax gross-up is generally required to be disclosed on Schedule J of the Form 990.
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.
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