January/February 2018

Impact of Recent Tax Reform on Tax-Exempt Organizations

Although it may seem counterintuitive, it is important for charities and nonprofit organizations to consider the potential impact of the recently passed tax reform legislation on tax-exempt organizations. Almost doubling the standard deduction will substantially reduce the number of taxpayers that can benefit from itemizing their deductions, thus reducing the cherished tax incentive for charitable giving.

Major uncertainties
Tax-exempt organizations of all sizes may face a new philanthropic environment in the years to come. One of the beneficial provisions in the Act for charitable giving is the increase in the amount of a deduction an individual can take for donation to a charity (from 50 to 60% of his/her AGI). Conversely, charities should be aware of the potential impact on donations and contribution revenue as a result of the increase in the standard deduction (up to $24,000 for couples and $12,000 for individuals) and a reduction in the tax rates. Starting in 2018, taxpayers who elect the higher standard deduction would not be able to itemize their charitable contributions as they have been in the past. As electing the higher standard deduction essentially removes the tax incentive to donate, this change has the potential to dramatically reduce contributions.

Other notable areas of the reform
Below are a few other notable areas of the reform that nonprofits should stay abreast of:

- College athletic event tickets  - a deduction is no longer permitted for payments made in exchange for the right to purchase tickets at a college athletic event, which repeals current law that allows an 80 percent charitable deduction for such payments.

- Doubling of estate and gift tax exemptions – this has the potential to incentivize far fewer wealthy taxpayers from using tax planning strategies such as “planned giving” to reduce their tax liabilities.

-Unrelated Business Income Tax (UBIT) generated by charities – Charities would no longer be able to apply losses from an unprofitable unrelated business against the income generated on a profitable unrelated business.  The lower corporate tax rates (top rates were reduced from 35% to 21%) will apply to charities established as corporations that file Form 990-T.  In addition, amounts spent on qualified transportation fringe benefits, parking facilities, and onsite athletic facilities will be subject to UBIT.  Lastly, net operating losses (NOLs) arising after December 31, 2017 will no longer be allowed to be carried back and carryforwards will only be allowed to offset 80% of taxable unrelated business income.

-New changes in the tax-exempt treatment of interest income from certain bonds issued by nonprofits – The provision in the Internal Revenue Code that excludes from taxation interest payments on advance refunding bonds issued by tax-exempt organizations has been repealed.  This will mean that the bond-issuing organizations will have to pay more interest in order to compensate for the tax burden that investors now must bear.

-New excise taxes on selected nonprofits – this could affect private nonprofit colleges and universities with substantial endowments as the new law includes a 1.4 percent excise tax on the net investment income of any private nonprofit college or university meeting certain criteria.

-Executive compensation – tax-exempt organizations will be liable for an excise tax of 21 percent of compensation in excess of $1 million for the top five highest paid employees as well as excessive severance payments. 

For more information, refer to the full tax bill signed into law by the president here.  Stay tuned for further updates on the areas above as we begin to develop best-practices in tax strategies in the coming year. 

IRS Releases Notice for Public Comment on Donor Advised Fund Tax Reporting Issues

In December, the IRS released a notice (Notice 2017-73) that outlines proposed regulations related to permissible uses of donor advised funds (DAFs) in furtherance of philanthropic objectives.  The proposal details two specific uses of DAFs along with the anticipated excise tax ramifications of each as well as potential changes to the public support test calculation as a result of a loophole existing in current tax law to enable use of DAFs to avoid public support test limitations.  The first issue addressed by the proposal relates to making payments from a DAF to purchase tickets to a charity-sponsored event - under the proposed regulations, such payments would be subject to excise tax under IRC §4967; the second issue covered in the notice relates to satisfaction of donor charitable pledges from a DAF – under the guidance, this would not result in a more than incidental benefit under IRC §4967 and, therefore, would not be subject to excise tax if certain conditions are met; the final tax reporting issue in the notice relates to the public support calculation for organizations described in IRC §§ 170(b)(1)(A) and (509(a)(1) and 509(a)(2).  The proposed regulations would treat donor gifts made via DAFs as indirect contributions from the donor that funded the DAF which would be subject to the 2% public support test limitation.   Find the full notice here.

In other news

Edelstein recently posted a white paper which discusses best practices for establishing effective internal controls for smaller Nonprofit Organizations, written by our very own, Greg Rogers. If you haven’t had a chance to read it yet, check it out here
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