Tax reform, tax reform, tax reform

NONPROFIT NEWS

The House of Representatives passed its tax bill, the House Tax Cuts and Jobs Act, on Nov. 16, and the Senate subsequently passed its tax bill, the Senate Tax Cuts and Jobs Act, on Dec. 2. We are currently waiting for the two bills to be reconciled in conference and to see what final version comes out of that process. However, it seems clear that there is likely to be significant impact on the nonprofit sector no matter what, including in the areas discussed below.

Charitable Contribution Deductions

Both the Senate and House bills contain provisions that may impact charitable giving by reducing the number of individuals who itemize their deductions. Both bills would increase the standard deduction for all filers, and would therefore decrease the number of filers claiming deductions exceeding the standard deductions. With respect to charitable giving, this means that only those filers with large amounts of deductions to claim will itemize and receive the benefit of the charitable contribution deduction. Both bills also include provisions increasing the deductibility limit for cash donations from 50 percent to 60 percent of adjusted gross income, although such increase would only be available for those filers who would continue to itemize their deductions.

While deductibility is certainly not the only motivation for charitable giving, there is significant concern that the large reduction in itemized filers that will result from the tax bills could dramatically impact individual donations to 501(c)(3) entities from all but the wealthiest of donors.

Johnson Amendment

If you've read this column more than once, you've likely seen commentary on the various shortsighted and misguided proposals and actions coming from Trump and the Republican Party regarding the Johnson Amendment and the prohibition on 501(c)(3)s engaging in political campaign intervention activities. Unsurprisingly, tax reform again brings this issue to the forefront. While the Senate bill did not include a provision to change the Johnson Amendment, the House bill included a partial repeal.

The language in the House bill provides that a 501(c)(3) exempt organization shall not be deemed to have engaged in prohibited campaign intervention activity "solely because of the content of any statement which (A) is made in the ordinary course of the organization's regular and customary activities in carrying out its exempt purpose, and (B) results in the organization incurring not more than de minimis incremental expenses." The language further provides that it will apply to taxable years beginning after Dec. 31, 2018, and before Dec. 31, 2023.

The short provision does not define the terms "ordinary course", "regular and customary activities", or "de minimis incremental expenses", leaving many questions and much room for disputes and litigation. It remains to be seen whether the reconciled bill will include a provision modifying the Johnson Amendment or if our legislators will heed the warnings coming from many in the nonprofit sector, including religious leaders, of the harmful ramifications that would likely flow from such a move.

Unrelated Business Income Tax

Both the House and Senate bills include provisions that would generate revenues to offset other tax cuts by increasing the unrelated business income tax (UBIT) owed by nonprofits for income derived from certain activities. The House bill expands the application of UBIT to include certain fringe benefits provided to employees, including transportation benefits and access to gym facilities. It would also limit the current exclusion from UBIT of income from certain research activities only to income related to research that is made freely available to the public. The Senate bill will require nonprofits that operate multiple unrelated trades or businesses to calculate the net income for each activity separately, rather than in aggregate, which is likely to result in an increase of UBIT for some organizations that otherwise offset gains from one unrelated business activity with losses from another.

Estate Tax

Both bills double the current threshold at which the estate tax applies to about $11 million for individuals and $22 million for couples. These increases would exempt almost all households from the estate tax, and the House bill would further fully repeal the estate tax after 2024. These changes are likely to further reduce charitable giving by removing the tax incentive for wealthy individuals to do so as part of the estate planning process. According to Independent Sector, an analysis estimates that that the House bill provisions regarding the estate tax would result in an additional $4 billion reduction in charitable giving.

Nonprofit University Endowments

A clearly political move, both bills also include a provision imposing a new 1.4 percent excise tax on the nest investment income of nonprofit colleges and universities with more than 500 full-time students. The House bill would impose the excise tax on those colleges and universities with assets of at least $250,000 per full-time student, and the Senate bill would impose it on those with assets of at least $500,000 per full-time student. Many have expressed significant concern over this legislative intrusion on the financial management decisions made by the boards of such public charity entities.

Private Foundation Net Investment Income Excise Tax

Private foundations are currently subject to an annual excise tax of one or two percent of net investment income, depending on whether they meet certain distribution requirements during the taxable year. The Senate bill does not include any provisions modifying this excise tax, but the House bill includes a provision setting a flat excise tax rate of 1.4 percent for all private foundations.

The Council on Foundations has generally advocated for a simplification of the excise tax to a flat tax to permit foundation staff time and assets to be dedicated to matters other than monitoring investments and spending for purposes of calculating the tax rate, and to remove a disincentive to increased foundation grantmaking in response to unanticipated events. The National Council of Nonprofits, on the other hand, has cautioned that it has been estimated that the flat tax will increase taxes on private foundations, which may therefore result in fewer or smaller grants to public charities.