Tax Reform Highlights for Not-For-Profit-Organizations

 

Highlights of Interest to Not-For-Profit Organizations

 

  • Decrease in Corporate Tax Rate:  The corporate tax rate drops from a top rate of 35% to 21%.
  • Charitable Contributions:  The income-based limitation for cash contributions to public charities and certain private foundations have increased from 50 percent to 60 percent.  The provision retains the 5-year carryover period to the extent that the contribution amount exceeds 60 percent of the donor’s AGI.
  • Educational Savings Plans:  Section 529 plans are now available for elementary and secondary tuition.
  • Excise Tax on some Private Colleges and Universities:  There is a 1.4 percent excise tax on the net investment income (to be defined in regulations) of private colleges and universities who are “applicable educational institutions” (AEIs) – generally meaning the school has at least 500 students and 50% of its students are located in the U.S.  The threshold computation applies to AEIs with an aggregate fair market value of the assets at the end of the preceding taxable year (other than those assets that are used directly in carrying out the institution’s exempt purpose) of at least $500,000 per student.
  • Each Unrelated Business Activity Stands Alone with Respect to Profit/Loss:  A deduction from one trade or business for a taxable year may not be used to offset income from a different unrelated trade or business for the same taxable year.  For an organization with more than one unrelated trade or business, the provision requires that unrelated business taxable income first be computed separately with respect to each trade or business and without regard to the specific deduction.  There is a transition rule that says net operating losses arising in a taxable year before January 1, 2018 that are carried forward to a future taxable year are not subject to this rule.
  • Estate Tax:  The estate tax is retained with the exemption amount doubled.  Note this provision will expire in 2026.
  • Excess Compensation:  There is a 21 percent excise tax in excess of $1 million paid to a covered employee (i.e., one of the five highest compensated employees of the organization) by an applicable tax-exempt organization where there is no substantial risk of forfeiture of the rights to such remuneration (as defined in IRC Section 457(f)(3)(B)).  There are several limitations and exemptions to this rule.
  • UBIT on Certain Fringe Benefits:  Unrelated business taxable income includes any expenses paid or incurred by a tax-exempt organization for qualified transportation fringe benefits, a parking facility used in connection with qualified parking or any on premises athletic facility, provided such amounts are not deductible under IRC Section 274.
  • Repeal of Advance Refunding Bonds:  Interest on advance refunding bonds (i.e., refunding bonds issued more than 90 days before the redemption of the refunded bonds) is taxable.  Interest on current refunding bonds continues to be tax-exempt.  The provision is effective for advance refunding bonds issued after 2017.
  • Suspension of Moving Expenses:  The provisions suspend the moving expense deduction and qualified moving expense reimbursements through 2025, with exclusions for active duty military.