How Tax Reform Impacts Nonprofits

How Tax Reform Impacts Nonprofits.

by John M. Robinson, CPA (Greensboro Office)

The President signed the “Tax Cuts and Jobs Act” on December 22, 2017. While much focus has been on how the Act might impact individuals and businesses, there are several provisions that are of note to nonprofits. The following is a summary of a few of these provisions.

A major provision affecting nonprofits is the proposed increase in the standard deduction for individuals. This would reduce the number of individuals who itemize deductions on their returns. Those individuals who no longer itemize deductions may have less incentive to make charitable contributions, because they will not realize the same tax benefits that they did previously.

The Act brought in two additional transactions for which nonprofits will be liable for a penalty in the form of an excise tax:

•If the entity pays compensation of $1 million or more to any of its five highest-paid employees, it will be subject to a 21% excise tax on compensation over $1 million for those individuals.

•Certain private colleges and universities with assets of at least $500,000 per student and more than 500 full-time students will be subject to an excise tax of 1.4% on their net investment income. In the past, such investment earnings were excluded from taxation.

In addition to excise tax changes, the new law also makes a major change to the calculation of unrelated business taxable income (UBTI). For tax years beginning after 12/31/2017, UBTI must be calculated separately for each unrelated activity conducted by the charity. Losses from one activity may create an NOL for that activity, but may not be used to offset UBTI from other activities within the entity.

On a positive note, there were several provisions that were included in the House Bill but NOT implemented in the final Act:

•Provisions that would weaken limits on 501(c)(3) organizations participating in political activities. The final Act diverges from the House Bill and leaves current law intact.

• Provisions that would have classified royalty income derived from the licensing of a tax-exempt organization’s name or logo as unrelated business taxable income. The final Act diverges from the House Bill and leaves current law intact.

Now that the Act has been passed, the IRS will be busy updating tax forms and instructions and issuing Treasury Regulations to explain how it interprets many of the new provisions. Be sure to stay tuned as we learn more about compliance issues related to the Act.

 

John Robinson

John M. Robinson Tax Senior Manager, CPA

John is a tax senior manager and has worked at BRC since 2001. He is responsible for providing tax compliance and consulting services to a wide variety of clients. His primary industry experience includes individuals, manufacturing, retail and wholesale, and not-for-profit organizations. Education Appalachian State University – Bachelor of Science in Business Administration, Concentration in […]