Just because you’re tax-exempt doesn’t mean you’re exempt from tax laws. In fact, it’s quite the contrary! When there is major sweeping change to national tax laws, many organizations are left wondering how they’ll be affected and what to do. The Tax Cuts and Jobs Act (H.R. 1), which was signed into law on December 22, 2017, impacts all taxpayers and has special ramifications for tax-exempt organizations.
Financial experts, lawyers and tax attorneys are working hard to help individuals and companies better understand and address the charitable implications of tax reform. For nonprofits and tax-exempt organizations, here are some highlights of what you need to know about the Tax Cuts and Jobs Act:
Increase in standard deduction
The Tax Cuts and Jobs Act increases standard deductions from $6,350 to $12,000 for single individuals and from $12,700 to $24,000 for married couples. Only taxpayers who itemize deductions get the benefit of a charitable contribution deduction.
Implications
Some experts anticipate a drop in annual charitable giving and an increase in “bunch” gifts where individuals choose to donate larger sums every few years, rather than yearly donations.
What you can do
Charities should continue to increase efforts on donor engagement, as well as educate donors on benefiting from itemized deductions. The IRS has tips for taxpayers looking to maintain legal compliance and deduct charitable donations.
Charitable giving deductions
The Act increases the amount of a deduction an individual can take for giving cash to a charity from 50% to 60% of adjusted gross income. Additionally, the estate and gift tax exemption doubles from $5.6 million to $11.2 million.
Implication
High net worth philanthropists and donors can benefit from this increase in deductions on gifts to charities and donor-advised funds. This can be an incentive to contribute greater cash sums as part of strategic wealth planning.
What you can do
Consider planned giving as a source of fundraising dollars. We often help our clients with diverse issues specific to nonprofits, including long-term philanthropy and planned giving.
UBTI reform
Tax rate on unrelated business taxable income (UBTI) is reduced from a maximum of 35% to 21%. However, UBTI will be taxed at each instance for organizations carrying more than one unrelated trade or business.
Implications
The Tax Cuts and Jobs Act now makes it difficult for organizations to use losses related to one trade or business to offset income from another. However, the reduced maximum can help offset some of the taxes.
What you can do
Learn more about Unrelated Business Income Tax (UBIT) and to determine if/when you’re subject to UBIT. This is a complicated subject but we can help you navigate the details if you need additional support.
Lobbying and professional dues
The bill eliminates the deduction for local lobbying expenses that were previously considered ordinary and necessary business expenses. In addition, deductions for membership dues are no longer allowed.
Implications
Professional societies, trade associations and membership organizations take note! Still addressed as an UBTI concern, 501(c)4, 501(c)5 and 501(c)6 tax-exempt organizations will need to consider lobbying expenses in non-deductible membership dues or proxy tax liability.
What you can do
501(c)3 public charities have strict restrictions against political campaign activities, but if your organization falls under one of the tax codes listed above, you will need to address budget concerns related to increased expenses.
Employee benefits and payroll deductions
Employers that offer some qualified fringe benefits, including commuting, parking, and entertainment expenses, will no longer be able to deduct amounts incurred or paid. Instead, funds used to pay for the benefits will be considered taxable UBIT.
Implications
Tax-exempt employers will be taxed on the value of providing qualified fringe benefits. Employees may still be able to contribute pre-tax dollars to such benefits. There are additional ramifications for Family and Medical Leave Act in determining whether offering paid leave will serve as a new tax benefit for employer – a separate bill set for November (Workflex in the 21st Century Act, H.R. 4219) will tell us more.
What you can do
Employment law can be sensitive. Review your employee benefits and policies with human resources and determine the tax implications of fringe benefits. Note that in some cases, employers will still need to offer certain benefits to comply with state and local laws.
Executive compensation
There is a new excise 21% tax on compensation over $1 million for nonprofit executives.
Implications
The organization will need to pay this tax for individuals making $1 million or more annually. This may come into play with larger organizations, nonprofit hospitals and foundations.
What you can do
Analyze existing executive contracts and determine whether to reconsider compensation or to incorporate the excise tax into your budget.
Tickets to College Athletic Events
The new law removes certain tax deductions for contributions related to season athletic tickets. Current law allows a donor who makes a contribution to a university and receives priority tickets at athletic events in exchange for that contribution, to take a charitable contribution deduction of 80% of the amount donated. Now, no charitable contribution will be allowed, as the contribution made is treated as the value of the priority seating.
Implications
The new law effectively removes that 80% deduction; any contributions that are tied to the right to purchase athletic tickets will no longer be considered charitable donations.
What you can do
Some university athletic supporters may change their giving patterns. Large athletic departments across the nation are watching trends, since such contributions often make up one of the biggest annual revenue streams in college athletics programs.
Nonprofit law can be cumbersome and confusing. We’ve just skimmed the surface of this incredible complex tax reform. For those looking for additional reading, the National Council of Nonprofits has gathered some great resources for nonprofit professionals seeking more detail on the implications of these tax changes.
We’re working with our clients to navigate the ins and outs of this tax reform and answer their specific questions. If you feel your organization needs support in making the most of the Tax Cuts and Jobs Act, contact us to schedule a legal appointment.