Tax Cuts and Jobs Act: A Comparison of Key Provisions for Tax-Exempt Organizations

November 17, 2017

The Senate weighed in on tax reform by releasing a revised Chairman’s Mark of the “Tax Cuts and Jobs Act” on Nov. 14, 2017. Many provisions of the Chairman’s Mark closely track the House bill, but the two differ substantially in their proposals for tax-exempt organizations. On Nov. 16, the House passed its version of the bill and the Senate Finance Committee voted to advance its tax bill out of committee.

Charitable Contribution Deduction

Both: The Senate Chairman’s Mark and the House bill would allow taxpayers who itemize to claim deductions of up to 60 percent of income — an increase from the current limit of 50 percent — for aggregate annual contributions to public charities and certain other organizations.  Both bills would nearly double the standard deduction — from $6,350 to $12,000 for single individuals and from $12,700 to $24,000 for married couples. Both would repeal certain deductions, including those for medical expenses, casualty losses and tax preparation costs.  They also would eliminate or limit others, such as the deduction for state and local taxes, although they differ in their approaches. Additionally, both would eliminate the statutory provision that excuses a donor from obtaining a contemporaneous written acknowledgement of a charitable gift if the donee organization files a return with the required information. 

House: The House bill would eliminate the statutory cap of 14 cents per mile on deductions for charitable use of a personal vehicle and instead would adjust the rate for inflation. 

Senate: The Chairman’s Mark would have an electing small business trust follow the charitable contribution deduction rules for individuals, including applicable percentage limitation and carryforward provisions.

Estate and Generation-Skipping Transfer Taxes

Both: Both proposals would double the federal estate and generation-skipping transfer tax exemption from $5.6 million to $11.2 million per individual, allowing a married couple to shelter up to $22.4 million from transfer taxes.

House: The House bill would repeal both taxes in 2024, but beneficiaries would remain entitled to a stepped-up basis in estate assets. The legislation retains the gift tax but lowers its rate from 40 percent to 35 percent.

Senate: The Senate Chairman’s Mark does not repeal the estate and generation-skipping transfer taxes.

Unrelated Business Income Tax (UBIT) 

House: The House bill would confirm that all organizations exempt from tax under Internal Revenue Code §501(a) are subject to the tax on unrelated business income, including those that are also exempt under other sections of the law, such as §115, relating to affiliates of state and local governments. The legislation also would declare that income from research is subject to UBIT unless the research results are made available to the public without charge. 

Senate: The Chairman’s Mark would impose unrelated business income tax on any income from the sale or licensing of a tax-exempt organization’s name or logo. It also would prohibit tax-exempt organizations from offsetting taxable income from one unrelated business activity with losses from another unrelated business. The Chairman’s Mark also would revoke the tax-exempt status of professional football leagues. 

Colleges and Universities 

Both: Both proposals would prohibit deductions for amounts paid for the right to purchase tickets to college athletic events. Current law allows a deduction for 80 percent of such payments. Both would impose a 1.4 percent excise tax on net investment income from the endowment of any private college or university that has at least 500 students and has investment assets valued at $250,000 or more per full-time student. The tax would also apply to income from investment assets of any organization related to the college or university, including supporting organizations. State colleges and universities would not be liable for the tax.

Exempt Organizations as Employers 

Both: A tax-exempt employer would incur a 20 percent excise tax on compensation of more than $1 million paid to any of its five highest-paid employees and on any parachute payment that exceeds three times the employee’s base salary. Compensation includes cash and the value of all benefits except for designated Roth contributions. 

House: The House bill would declare that the value of housing provided to an employee for the employer’s convenience could be excludable from the employee’s income only up to $50,000 per year, limited to one house and phased out for highly compensated employees. Similar rules would apply to other housing provided to employees of educational institutions. Tax-exempt employers also would pay unrelated business income tax on the value of transportation fringe benefits and on-premises gyms and other athletic facilities that employees can exclude from their taxable income. 

Private Foundations 

Both: Both proposals would permit a foundation to own an independent for-profit business without violating the excess business holdings rule.

House: The House bill would subject the net income of all private foundations to a uniform excise tax rate of 1.4 percent, eliminating the current 2 percent excise tax, which can be reduced to 1 percent if the private foundation meets certain distribution requirements. It also would require a foundation that operates an art museum to be open to the public for at least 1,000 hours each year.

Intermediate Sanctions

Senate: The Chairman’s Mark would extend the intermediate sanctions rules under section 4958 to tax-exempt organizations described in sections 501(c)(5) (labor organizations) and 501(c)(6) (trade associations) and expand the definition of a disqualified person to include athletic coaches and investment advisors. It also would impose a new 10 percent excise tax on a tax-exempt organization that participates in an excess benefit transaction willfully and without reasonable cause. The tax-exempt organization could avoid the tax by showing that it (1) met a minimum standard of due diligence and (2) followed reasonable procedures to ensure that no excess benefit was provided. 

The Chairman’s Mark would eliminate the current procedure for creating a rebuttable presumption that a transaction is reasonable; instead, following the procedure would be only one factor in determining whether the tax-exempt organization and its individual managers acted according to minimum standards of due diligence. It also would eliminate the current rule that a manager’s participation in an excess benefit transaction is not “knowing” if the manager relied on professional advice.  

Financing for Exempt Organizations

Both: Both proposals would impose income tax on interest from advance refunding bonds issued after 2017.    

House: The House bill would not allow any additional new market tax credits after 2017 for investments in qualified community development entities that serve low-income communities and low-income individuals. Private activity bonds issued after 2017 by state and local governments to finance private projects would no longer be exempt from income tax. Governments and other entities would no longer be able to issue tax credit bonds, which generate federal tax credits fully or partially in lieu of interest payments. 

Donor-Advised Funds 

House: The House bill would require sponsors of donor-advised funds to disclose annually their policies on inactive funds and the average amount of grants made from their funds. 

Political Campaign Intervention 

House: The House bill declares that a §501(c)(3) organization will not jeopardize its tax-exempt status solely by taking a position on behalf of, or in opposition to, a political candidate, as long as the action is in the ordinary course of the organization’s business and its expenses are de minimis. This change would become effective Jan. 1, 2019, and sunset on Dec. 31, 2023. For a full discussion of efforts to remove the political campaigning prohibition from §501(c)(3) organizations, see McGuireWoods’ March 2017 legal alert “GOP Proposes Allowing Charities to Take Political Sides.”

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