With the recent tax reform legislation of the 2017 Tax Cuts and Jobs Act (TCJA), there are many questions about how the changes impact Non-Profit Organizations (NPOs). We have summarized several key provisions that most directly affect NPOs. Unless otherwise noted, all of these provisions were effective on January 1, 2018.
IMPACTS TO CHARITABLE GIVING
Standard Deduction Increase
For 2018, the standard deduction will be $24,000 for married couples filing jointly, $18,000 for unmarried individuals with at least one qualifying child, and $12,000 for single taxpayers. The standard deductions were increased substantially from 2017. While this provision directly benefits most individual taxpayers, NPOs could be negatively affected by this change. With an increase to the standard deduction, as well as less favorable itemized deduction regulations, there are less incentives for individuals to itemize their deductions. Charitable contributions are among the deductions includable when taxpayers elect to itemize. There is some concern by NPOs that since some taxpayers will no longer be receiving a tax benefit for their charitable deduction, they may be less inclined to donate. On the other hand, individual taxpayers may have more disposal income as a result of the tax reform, which may increase charitable contributions. As for the actual impact on NPOs, only time will tell for certain.
Cash Contribution Limitations
The previous tax regulations allowed for individuals to deduct cash charitable contributions up to 50% of their Adjusted Gross Income (AGI). The TCJA increased that threshold to 60% of AGI. While the 10% increase is substantial, the pool of taxpayers whom give 50% (or 60%) of their AGI is very limited.
Estate Tax Changes
Under the TCJA, each individual can transfer up to $11.2 million from their estate tax free. This is more than double the exemption limits for 2017. This may impact charitable contributions, particularly bequests because large bequests are oftentimes utilized as a strategy by high-wealth individuals to avoid estate taxes.
Athletic Event Tickets
In the past, taxpayers have been able to deduct, as a contribution, 80% of the value of a contribution made to an educational institution to secure the right to purchase athletic event tickets. With the TCJA, this special rule has been repealed, and thus donors no longer benefit from this deduction.
Previously, businesses were able to deduct a portion of the cost of entertainment and recreation expenses as long as the business demonstrated there was a direct relationship between the expense and the active conduct of business. Under the TCJA, no deduction will be allowed for membership dues with respect to any club organized for business, pleasure, recreation, or other social purpose. Non-profit member-based organizations may see a reduction in dues as a result, given that these membership expenses are no longer allowable business deductions.
UNRELATED BUSINESS INCOME
Income generated from a trade or business regularly carried on by the organization that is not substantially related to the performance of the organization’s tax-exempt function is considered unrelated business income and is generally taxable.
Separate Computation of UBTI for Each Trade or Business
The TCJA now requires the tax-exempt organization to compute its unrelated business taxable income (UBTI) separately for each trade or business. The organization’s UBTI is the sum of the amounts (not less than zero) computed for each separate unrelated trade or business. A net operating loss (NOL) deduction is allowed only with respect to the trade or business from which the loss arose. Thus a NOL arising from one unrelated trade or business activity may no longer be used to offset net income from a separate unrelated trade or business activity. NOLs arising in years beginning before January 1, 2018 that are carried forward to a taxable year beginning on or after that date are not subject to these rules. Additionally, NOL carrybacks are no longer allowed and carryovers will be limited to 80% of the taxable income.
Private foundations are subject to a 2% excise tax on their net investment income, subject to a reduction to 1% if certain distributions are made by the foundation. This remains unchanged in the TCJA.
In the past, the 2% excise tax on net investment income (mentioned previously) did not apply to public charities, including colleges and universities. Under the TCJA, a 1.4% excise tax on net investment income will apply to private colleges and universities for which there are at least 500 tuition-paying students and assets valued in excess of $500,000 per full-time equivalent student. However, state colleges and universities are exempt from this provision.
Kari Young, CPA is a senior manager and a key member of the Jones & Roth Nonprofit Team and Assurance Services Department. She is also a member of the firm’s quality control team and the Form 990 Task Force. She holds expert knowledge in nonprofit audits and reviews, federal single audits, consulting services including internal control review, and informational return preparation services.
Laura McKay, CPA is a manager and key member of the Jones & Roth Nonprofit Team and Assurance Services Department. She has extensive experience working with both nonprofit and commercial businesses and manages many of the firm’s largest and most complex audit engagements. Laura is highly involved in the development and instruction of firm-wide continuing education and the firm’s Form 990 Task Force.