The Tax Cuts and Jobs Act (“Act”) was signed into law by President Trump on Friday December 22, 2017. I reported on the following items in the Act that affect tax-exempt charities, as well as their donors, at the January 9, 2018 meeting of the Southwestern Planned Giving Council (“PPGC”).
1. Standard Deduction. The Act nearly doubles the standard deduction and repeals personal exemptions. This change should benefit many taxpayers; however, some charities fear that it may lead to a reduction in overall charitable giving as taxpayers have less incentive to itemize deductions. The standard deduction increases from $12,700 for married, filing jointly, to $24,000. For single taxpayers, the standard deduction increases from $6,350, to $12,000. The standard deduction is also indexed for inflation.
2. The Act increased the charitable deduction limit for individuals to 60% of gross income, which is up from the current limit of 50%.
3. “Pease” Limitation. The Act repeals the so-called “Pease” Limitation, named after former Senator Donald Pease, which acted to decrease itemized deductions for high income taxpayers. The Pease Limitation reduced the benefits of itemized deductions, including the charitable deduction. The Act effectively allows high income taxpayers to give to charity and enjoy the full benefits of their charitable deduction, assuming they exceed the standard deduction. It is anticipated that repealing the Pease Limitation could help high income taxpayers donate more to charitable organizations.
4. College Athletic Events. The Act repeals the current 80% charitable deduction for a donor who receives priority seating at an athletic event in exchange for a payment.
5. Excise Tax on Executive Compensation. The Act imposes a 21% excise tax on compensation of covered employees in excess of $1 million dollars. This tax is imposed on the employer.
6. Estate and Gift Tax Exemption Increased. The Act doubles the estate and gift tax exemptions from 5 million to 10 million, as adjusted for inflation, beginning in 2018. Some charities fear that the increase in this exemption amount could reduce the incentive for wealthy individuals to make charitable contributions out of their estates, as now more property can be transferred to beneficiaries without payment of the federal estate tax.
7. Excise Tax on Endowments of Colleges. The Act includes a new excise tax of 1.4% of the net investment income of “applicable educational institutions”. This provision is intended to apply a private foundation-like excise tax on net investment income of colleges and universities that have built large endowments and have at least 500 tuition-paying students.
8. Changes to UBTI. The Act disallows tax-exempt organizations from taking business losses from one unrelated business taxable income (UBTI) activity and deduct them from the gains of another UBTI activity. Also, the Act now includes employer costs for qualified transportation fringe benefits, parking facilities and onsite gyms in UBTI. These provisions were enacted to equalize the treatment between taxable corporations that can no longer deduct these amounts and tax-exempt organizations.
9. Standard Mileage Rate. The provision increasing the standard mileage rate for charitable use was dropped from the Act. The standard mileage rate for charitable use of an automobile remains at the current 14 cents per mile.
10. Corporate Tax Rate Reduction. The maximum tax rate paid by corporations is being reduced from 35% to 21%. Some think that this reduction in the corporate tax rate could lead to a reduction in charitable contributions made by corporations.
11. Non-itemized Charitable Deduction. The Act did not include the proposal to allow a universal charitable tax deduction which would be available to all taxpayers whether they itemize or not.
12. Johnson Amendment. The Act did not include the provision in the House bill that would have enabled tax-exempt organizations to express their favor, or disfavor, for political candidates. Therefore, the tax law is still clear that tax-exempt organizations are not permitted to engage in political activity, as defined, without losing tax-exempt status.
This legislation is quite complicated, many of the provisions expire after 2025 and is the first rewrite of the Internal Revenue Code since 1986. There will undoubtedly be technical corrections, and regulations needed from the Department of Treasury to clarify many provisions. In the meantime, tax-exempt organizations need to understand the provisions which could potentially affect their operations, charitable giving, and employees.
Note: This provides general information regarding matters of interest to tax-exempt organizations. Such information is neither legal advice nor legal opinion concerning particular situations. If legal advice or opinion is required, legal counsel should be consulted.