By Rob Brinkers After many months of deliberation, on Dec. 20, Congress completed passage of the largest federal tax reform law in more than 30 years. Commonly called the “Tax Cuts and Jobs Act” (TCJA), the new law means substantial changes for nonprofit organizations.
Despite the bill’s nearly 1100 pages, below is a brief overview of some of the most significant provisions impacting nonprofits. Except where noted, these changes are effective for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026.
Changes which DID pass:
- Excise tax of 21 percent will be imposed on wages in excess of $1 million for any covered employee of a nonprofit entity, which includes any former or current employee of a tax exempt organization who is one of the five most highly compensated employees for the taxable year.
- Excise tax of 1.4 percent will be imposed on net investment income of some colleges and universities. This tax will apply to institutions with at least 500 students whose investment accounts have a fair market value of $500,000 or more per student and will impact large endowment account balances.
- Unrelated Business Taxable Income (UBTI) will be calculated separately for each trade or business. A loss on one activity cannot be used to offset income from a second activity. Tax will be imposed on the income-producing activity and the loss from the second activity must be carried forward as a net-operating loss (NOL).
- UBTI will be increased by disallowed fringe-benefit expenses. A tax-exempt organization must include in UBTI any amount for which a deduction is not allowed under Code Sec 274 (e.g. non-deductible meals and entertainment) and for certain qualified fringe benefits paid to employees (e.g. transportation fringe, parking, on-premise athletic facilities).
Changes which DID NOT pass:
- Above-the-line deductions for charitable contributions from individual taxpayers on their Form 1040 which would have likely stimulated contributions from taxpayers who may not be able to itemize deductions.
- Repeal or weakening of the Johnson Amendment. The Johnson Amendment is a provision in the tax code that prohibits 501(c)(3) organizations from endorsing political candidates.
Changes in other areas of taxation which impact nonprofits:
- Increase in standard deduction of individual taxpayers to $24,000 for married filing jointly. This increase, coupled with a $10,000 cap on all state and local income and property taxes, is expected to reduce the number of taxpayers who itemize deductions by 28 million, from its current 30 percent of all tax returns filed to 5-10 percent, according to the National Council of Nonprofits. This will result in fewer taxpayers benefiting from the charitable contribution deduction and therefore reducing the incentive to contribute. This is expected to result in as much as a $13 billion reduction in annual contributions from individuals, according to the Indiana University Lilly Family School of Philanthropy.
- Estate tax threshold will be doubled from its current level of $11 million per couple to $22 million. This will reduce the incentive for estates to include charitable bequests and is expected to reduce annual contributions $2-$11 billion, according to the Congressional Budget Office.
Be aware that additional rules and limits apply. Also, there are many more changes in the TCJA that will impact nonprofits. If you have questions or would like to discuss how you might be affected, contact Alerding CPA Group at 317-569-4181 or www.alerdingcpagroup.com.
This post was written by:
Robert K. Brinkers, CPA
Rob has over 20 years of public accounting experience in helping small businesses with their tax and accounting needs. Rob’s client base includes manufacturing, wholesale/distribution, technology companies, not-for-profits and private foundations.
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