United States: Tax Reform: Key Provisions For Tax-Exempt Organizations

After much uncertainty surrounding competing bills, the House of Representatives voted to pass comprehensive tax reform legislation (the "Act") on December 20, 2017, shortly after the Senate passed the measure. The Act will now be sent to President Trump's desk, and it is expected that he will sign the bill into law. The Act contains a number of provisions relevant to tax-exempt organizations, and many provisions contained in earlier versions of the legislation have been eliminated. Key provisions of interest are summarized below.

Tax on Private University Endowments

The Act imposes a 1.4% excise tax on the net investment income of certain universities, effective for tax years beginning in 2018. The tax will apply to any private university with at least 500 students (provided more than 50% of its students are located within the U.S.) if the aggregate fair market value of the university's assets (other than those assets used directly in carrying out the university's exempt purposes) is at least $500,000 per student. For purposes of determining net investment income and whether the asset-per-student threshold has been met, net investment income and assets of related organizations are generally included. Related organizations include organizations controlled by the university (or by persons who control the university), organizations that control the university, supporting organizations of the university, and organizations considered supported organizations with respect to the university.

There remain significant interpretive issues with this provision, including:

  • The definition of net investment income, which is the base on which the tax will be imposed. The statutory language indicates this will be determined under rules "similar to" the tax on net investment income of private foundations.
  • The definition of assets used directly in carrying out the university's exempt purposes, important because these assets are excluded from total assets for purposes of determining whether the asset-per-student threshold has been met and therefore whether the excise tax applies.

The Joint Explanatory Statement of the Committee on Conference indicates that regulations will be promulgated to address these and other issues.

Executive Compensation and Employee Fringe Benefits

The Act imposes an excise tax at the corporate rate (21%) on many types of tax-exempt organizations, including all 501(c)(3) organizations, for tax years beginning in 2018 with respect to two categories of compensation paid to "covered employees" (the organization's five highest compensated employees for the year and anyone previously considered a covered employee in a preceding year). The excise tax applies to:

  • Remuneration (generally wages and certain deferred compensation includible in income) in excess of $1 million paid to a covered employee during the organization's tax year; and
  • Any "excess parachute payments" (in general, severance or severance-type compensation equal to or in excess of three times the covered employee's average annual compensation over a specified look-back period).

Remuneration paid by a related organization is generally taken into account for purposes of the excise tax. There is a carve-out from both categories of compensation subject to the excise tax for amounts paid to licensed medical professionals in connection with the performance of medical services, and the excess parachute payment rules do not apply to non-"highly compensated employees," as that term is specifically defined in the Internal Revenue Code. The legislation contemplates that regulations will be needed to prevent avoidance of this new excise tax, such as through performance of services as other than an employee or by using a pass-through entity to pay compensation.

The Act also suspends through the end of 2025 the exclusion from gross income for certain employer-provided fringe benefits, including the exclusion for qualified moving expense reimbursements and the transportation fringe applicable to qualified bicycle commuting reimbursement, and relatedly suspends the availability of the deduction for moving expenses for the same period.

Additionally, any amount paid by a tax-exempt organization for any qualified transportation fringe, any parking facility used in connection with qualified parking fringes, or any on-premises athletic facility will generally be treated as unrelated business taxable income for tax years beginning in 2018.

Unrelated Business Taxable Income (UBTI)

UBTI "Basket" Provision. The Act requires UBTI to be computed separately with respect to each unrelated trade or business of a tax-exempt organization. The organization will then be taxed on the sum of the separately computed UBTI "baskets," less a single $1,000 specific deduction. Each separately computed UBTI amount cannot be less than zero. As a result, the Act prevents tax-exempt organizations from offsetting UBTI in one unrelated trade or business with net losses from another unrelated trade or business.

This provision is effective for tax years beginning in 2018. The Act permits net operating losses ("NOLs") generated in taxable years beginning before January 1, 2018 to be used in subsequent years without the basketing limitation that would otherwise be imposed by the Act. Accordingly, such NOLs could be used generally against UBTI from any trade or business. It is not clear whether capital loss carryforwards generated in prior tax years will be subject to the same treatment.

Guidance will be needed on the extent to which tax-exempt organizations may aggregate activities as a single trade or business. For example, it is unclear from the Act whether an organization's investments in multiple private investment funds would be treated as a single trade or business of investing, a separate trade or business with respect to each fund investment, or a separate trade or business with respect to each portfolio company owned by each of several private equity funds. It is also unclear how certain losses from debt-financed investments will be treated for purposes of the basketing provision.

Reduction in Tax Rate. The Act replaces the graduated corporate income tax rate structure and maximum 35% marginal rate with a flat 21% corporate income tax rate. Accordingly, UBTI of tax-exempt organizations that are corporations will be taxed at a 21% federal rate for tax years beginning in 2018.

Tax-Exempt Bonds

While the initial House bill would have repealed tax exemption for "private activity bonds" – a broad category of tax-exempt bonds that includes bonds issued for the benefit of tax-exempt organizations – the Act does not repeal the private activity bond tax exemption.

Under the Act, bonds that "advance-refund" tax-exempt bonds will lose their tax-exempt status. Refunding bonds – bonds issued to pay principal, interest or the redemption price on a prior bond issue – are classified as "current refunding" bonds if the refunded bond is redeemed within 90 days of the issuance of the refunding bonds, and as "advance refunding" bonds otherwise. Beginning in 2018, interest on advance refunding bonds will no longer be exempt from tax.

Provisions Affecting the Charitable Contribution Deduction

Increase in the Charitable Contribution Deduction Limitation. The amount an individual may deduct for a charitable contribution is limited to certain percentages of the donor's "contribution base" (essentially, the donor's adjusted gross income). Donations of cash by individuals to a private foundation are generally limited to 30% of a donor's contribution base. Under pre-Act law, donations of cash by individuals to public charities and certain private foundations are generally eligible for a more generous 50% donation cap.

The Act increases the 50% limitation for cash contributions to public charities and certain private foundations to 60%. Contributions exceeding the 60% limitation are generally allowed to be carried forward and deducted for up to five years. The provision sunsets at the end of 2025.

Increase in the Standard Deduction. The Act increases the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers. Under prior law, the 2018 standard deduction amounts would have been: $6,500 for single individuals and married individuals filing separately; $9,550 for heads of household, and $13,000 for married individuals filing jointly. The standard deduction increases sunset at the end of 2025.

Increasing the standard deduction is expected to result in a dramatic reduction in the number of taxpayers who choose to itemize and claim the charitable deduction. Many in the charitable community anticipate that this change will result in a significant decline in charitable giving.

Repeal of the "Pease" Limitation. Under pre-Act law, certain taxpayers who itemized their deductions were subject to a limitation on these deductions (the so-called "Pease" limitation). For taxpayers who exceed the threshold, the total amount of most otherwise allowable itemized deductions was reduced by 3% of the amount of the taxpayer's adjusted gross income exceeding the threshold. The total reduction could not be greater than 80% of all itemized deductions. The Act suspends the Pease limitation through the end of 2025.

College Athletic Event Seating Rights. Under pre-Act law, a donor was permitted to claim a charitable contribution deduction for 80% of the amount paid for the right to purchase tickets for athletic events. The Act repeals this rule for contributions made in tax years beginning in 2018.

Notable Omissions

Several provisions relevant to tax-exempt organizations that were proposed in earlier House or Senate versions of the legislation are not a part of the Act. These include:

  • Subjecting state and local government pension plans to the unrelated business income tax.
  • Repealing the tax exemption for private activity bonds, including qualified 501(c)(3) bonds.
  • Changing the "intermediate sanctions" excise tax regime to impose new organization-level excise taxes and treat all investment advisors and university athletic coaches as "disqualified persons."
  • Repealing the tax-free treatment of tuition benefits provided to employees of educational institutions (and their spouses and dependents) and the tax-free treatment of educational assistance programs offered by employers to their employees.
  • Repealing the tax-free treatment of housing benefits provided to employees who are required to accept housing on the business premises for the employer's convenience.
  • Subjecting tax-exempt organizations to unrelated business income tax on royalties from licensing the organization's name or logo.
  • Simplifying the existing two-tier excise tax rate on private foundation net investment income to a single rate of 1.4%.
  • Permitting section 501(c)(3) organizations to engage in certain political speech carried out in the ordinary course of the organization's regular activities at de minimis expense (modifying the so-called "Johnson Amendment").
  • Imposing additional reporting requirements on donor-advised funds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions