The House-Senate Conference Committee released the revised “Tax Cuts and Jobs Act” on Dec. 15, 2017. This compromise bill made major changes to the separate bills that the House and Senate passed earlier this year. Both houses of Congress are expected to vote on the bill this week, and President Trump has said that he hopes to sign it into law by Christmas.
Charitable Contribution Deduction
The annual limit on aggregate deductions for gifts to public charities and certain other organizations would increase from 50 percent to 60 percent of income. At the same time, the standard deduction would almost double — from $6,350 to $12,000 for single individuals and from $12,700 to $24,000 for married couples — and would be indexed for inflation, and deductions for state and local taxes, mortgage interest, uncompensated employee expenses, casualty losses, home equity loans, gambling losses and miscellaneous itemized deductions would be substantially curtailed.
These changes, coupled with the increased transfer tax exemptions described below, seem likely to cause a dramatic reduction in the number of donors who can derive any tax benefit from their charitable gifts.
The bill prohibits donors from deducting amounts paid for the right to purchase tickets to college athletic events. Current law allows a charitable deduction for 80 percent of such payments.
The bill also allows an electing small business trust (which is a type of trust eligible to own stock in an S corporation) to follow the charitable contribution deduction rules for individuals, including applicable percentage limitations and carryforward provisions. Additionally, the bill eliminates 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.
Estate and Generation-Skipping Transfer Taxes
The bill doubles the federal estate, gift and generation skipping transfer tax exemption — from $5.6 million to $11.2 million per individual — for decedents dying in years 2018 through 2025 and gifts made during that period. The exemption amount is indexed for inflation. This increase would allow a married couple to shelter $22.4 million or more from transfer taxes. The exemption would revert to current levels after 2025.
Unrelated Business Income Tax (UBIT)
The bill requires tax-exempt organizations to calculate income from each unrelated trade or business separately and prohibits them from offsetting taxable income from one such activity with losses from another.
Colleges and Universities
The bill imposes a 1.4 percent excise tax on the endowments of private colleges and universities endowments that have at least 500 tuition-paying students (more than 50 percent within the United States) and have investment assets valued at $500,000 or more per full-time student. Investments of any organization related to the college or university, including supporting organizations, would count toward the asset threshold. The tax would not apply to public colleges and universities.
Exempt Organizations as Employers
A tax-exempt employer would pay excise tax at the corporate rate (21 percent under the bill) on compensation of more than $1 million paid to any of its five highest-paid employees. The tax also would apply to a parachute payment that exceeds three times the base salary of a “highly compensated employee” (under current section 414(q)). Compensation would be treated as being paid when rights to it are not subject to a substantial risk of forfeiture. A special exclusion applies to payments to a licensed medical professional for medical or veterinary services.
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.
Financing for Exempt Organizations
The bill would impose income tax on interest from advance refunding bonds and prohibit issuance of tax credit bonds after 2017.
Broadening Recipients for 529 Accounts
The bill would allow payments of up to $10,000 per student for each taxable year from 529 college savings plans to elementary and secondary schools, including public, private, religious or home schools. Qualified expenses would include tuition, fees, books and other related costs.
The final bill did not include several provisions that were in earlier versions of the House and/or Senate bills:
- repeal deduction for student loan interest;
- repeal deduction for qualified tuition and related expenses;
- repeal exclusion for qualified tuition reductions;
- repeal exclusion for interest on U.S. savings bonds used for higher education expenses;
- repeal exclusion for education assistance program;
- increase 14 cents-per-mile statutory cap on deductions for charitable use of a personal vehicle;
- repeal estate tax or generation-skipping transfer tax;
- impose UBIT on all Internal Revenue Code section 501(a) organizations;
- impose UBIT on income from research if results are not publicly available;
- impose UBIT on income from sale or licensing of a tax-exempt organization’s name or logo;
- modify exclusion for housing provided for the employer’s convenience;
- permit private foundations to own an independent for-profit business without violating the excess business holdings rules;
- impose uniform 1.4 percent excise tax on private foundation investment income;
- require private foundation art museums to be open to the public;
- modify intermediate sanctions rules for private foundations;
- repeal new market tax credits;
- repeal private activity bonds;
- impose new disclosure requirements for donor-advised funds;
- prohibit tax-exempt bond financing for pro sports stadiums; and
- modify political campaigning prohibition for section 501(c)(3) organizations (the so-called “Johnson Amendment”).
McGuireWoods’ Nonprofit and Tax-Exempt Organizations Group
McGuireWoods’ nonprofit and tax-exempt organizations group provides advice and guidance that enable charities and other nonprofits to operate more efficiently and effectively in today’s increasingly complicated, regulated and competitive environment.
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