Batts Morrison Wales & Lee - News & Resources - Nonprofit Special Alert

Tax Reform Update: Senate Bill Passed

Most Significant Changes Proposed to Federal Tax Law in More Than 30 Years

Significant Impact for Nonprofit Organizations

Last Updated: December 7, 2017

Arm punching through a lot of papers - text says "Making Sense of the Tax Reform Bill"

As previously outlined in our November 8th Special Alert, the U.S. House of Representatives released a Bill on November 2, setting forth the most significant proposed changes to federal tax law in more than 30 years. The House Bill, known as The Tax Cuts and Jobs Act, has since been amended, and on December 2, the U.S. Senate passed its own version of the Bill. The legislation, representing a major overhaul of the U.S. tax system, contains numerous provisions directly and indirectly impacting nonprofit organizations. The House Bill (as amended) and the Senate Bill are expected to be further negotiated and reconciled before final legislation is voted on by both houses of Congress.

Following is a summary of the key provisions in the current version of the House and Senate Bills that would impact nonprofits.  We also note that, under the Senate Bill as currently drafted, a number of the proposed changes outlined below would expire after December 31, 2025.

The House Bill and the Senate Bill, collectively referred to herein as “the Bills,” as currently drafted, would:

1. Make changes to individual income tax rates. (Both House and Senate Bills, with differences described below)

a) Under the House Bill, the current seven tax brackets for individual taxpayers ranging from 10% to 39.6% would be simplified into four wider brackets: 12%, 25%, 35%, and 39.6%. Although the initial tax bracket would be higher under the Bill, it is anticipated that more taxpayers will not pay any taxes (due to the proposed increase in the standard deduction). For married couples filing jointly, the 39.6% rate would apply to taxable income in excess of $1 million. [Effective for taxable years beginning after December 31, 2017.]  Additionally, under the House Bill, the alternative minimum tax for individuals would be repealed, effective for taxable years beginning after December 31, 2017.

b) Under the Senate Bill, as modified, the current seven tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) for individual taxpayers would be modified. The new tax brackets would be 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%. For married couples filing jointly, the 38.5% rate would apply to taxable income in excess of $1 million. [Effective for taxable years beginning after December 31, 2017.]  Additionally, the Senate Bill would increase the exemption amounts for individuals from the alternative minimum tax.  Under the Senate Bill, the exemption for married individuals filing jointly would increase from $78,750 to $109,400 and the exemption for single individuals would increase from $50,600 to $70,300.  These increased exemptions begin to phase out when the alternative minimum taxable income exceeds $208,400 for married individuals filing jointly and $156,300 for single individuals.  The increased exemptions under the Senate Bill would be effective for taxable years beginning after December 31, 2017.

2. Reduce corporate income tax rates. (Both House and Senate Bills, with differences described below)

a) Under the House Bill, the current four tax brackets applicable to corporate taxpayers ranging from 15% to 35% would be simplified to a flat tax rate of 20% for corporations other than personal service corporations. Personal service corporations would be subject to a flat tax rate of 25%. The new brackets would be effective for taxable years beginning after December 31, 2017.  Under the House Bill, the alternative minimum tax for corporations would be repealed for taxable years beginning after December 31, 2017.

b) Under the Senate Bill, the current four tax brackets applicable to corporate taxpayers ranging from 15% to 35% would also be simplified to a flat tax rate of 20%. The new tax rate would be effective for taxable years beginning after December 31, 2018.  The Senate Bill would not repeal the alternative minimum tax for corporations.

Under both the House and Senate Bills, the 20% flat rate would be applicable to unrelated business taxable income of exempt organizations taxed as corporations, which could actually increase the taxes owed by exempt organizations with small amounts of taxable income.

3. Repeal the exclusion for qualified tuition reduction plans. (House Bill) Under current law, qualified tuition reductions provided by educational institutions to their employees, their spouses, or dependents are excluded from the employees’ taxable income. The House Bill would repeal this exclusion. This provision would apply to amounts paid or incurred after December 31, 2017. The repeal of this exclusion would have a major impact on the employees of private schools and private and public institutions of higher education.

4. Limit the exclusion for housing provided for the convenience of the employer. (House Bill) Under the House Bill, the exclusion from income of the value of housing provided to an employee for the convenience of the employer would be limited to $50,000 ($25,000 for a married individual filing a separate return). In addition, the $50,000 exclusion would be reduced for highly compensated individuals (those making $120,000 or more for 2017) by 50% of their compensation exceeding $120,000. The House Bill does not provide for any similar reduction of the exclusion from income for the value of parsonages or clergy housing allowances provided to ministers. [Effective for taxable years beginning after December 31, 2017.]

5. Modify the “Johnson Amendment,” allowing political statements to be made by §501(c)(3) organizations. (House Bill, as amended) The House Bill, as amended, would modify the “Johnson Amendment” that currently prohibits §501(c)(3) organizations from engaging in political campaign activity. Under the provisions of the House Bill, as amended, §501(c)(3) organizations would not be deemed to be engaging in prohibited political campaign activity solely because of the content of any statement, but only if the statement is made in the ordinary course of the organization’s regular and customary activities in carrying out its exempt purpose and does not result in the organization incurring more than a de minimis amount of incremental expenses. Under the House Bill as currently drafted, this provision would be effective for taxable years beginning after December 31, 2018, and would not apply to taxable years beginning after December 31, 2023.

6. Increase the standard deduction. (Both House and Senate Bills, with differences described below)

a) Under the House Bill, the standard deduction (for those taxpayers who do not itemize their deductions) would be approximately doubled from 2017 amounts to $12,200 for individual filers, $24,400 for married individuals filing joint returns and surviving spouses, and $18,300 for single filers with at least one qualifying child. These amounts would be adjusted for inflation beginning with the 2020 tax year.

b) Under the Senate Bill, the standard deduction (for those taxpayers who do not itemize their deductions) would be approximately doubled from 2017 amounts to $12,000 for individual filers, $24,000 for married individuals filing joint returns and surviving spouses, and $18,000 for head-of-household filers (typically, single filers with at least one qualifying child or dependent).

Under both Bills, the increase in the standard deduction would be effective for taxable years beginning after December 31, 2017. Presumably, the proposed increase in the standard deduction is intended to offset the effect of the elimination of the personal exemption and most itemized deductions.

7. Repeal the “Pease” limitation on itemized deductions. (Both House and Senate Bills) Both the House and Senate Bills would eliminate the overall limitation on itemized deductions (sometimes referred to as the “Pease” limitation) which currently reduces the itemized deductions of certain high-adjusted-gross-income (AGI) taxpayers. [Effective for taxable years beginning after December 31, 2017.]

8. Limit the itemized deduction for mortgage interest on acquisition indebtedness and/or eliminate the itemized deduction for mortgage interest on home equity indebtedness. (Both House and Senate Bills, with differences described below) Currently, individuals may take an itemized deduction for mortgage interest incurred on acquisition indebtedness (limited to indebtedness of up to $1,000,000) on the taxpayer’s principal residence and one other residence of the taxpayer. Additionally, taxpayers may take an itemized deduction for interest paid or accrued on qualifying home equity indebtedness (limited to indebtedness of up to $100,000) on the taxpayer’s principal residence and one other residence.

a) The House Bill would limit the itemized deduction for mortgage interest to interest incurred on acquisition indebtedness of up to $500,000 and would also limit the deduction to interest on the taxpayer’s principal residence. Additionally, the House Bill would eliminate the itemized deduction for mortgage interest paid or accrued on home equity indebtedness. Under the House Bill, the mortgage interest deduction limitations and eliminations would generally apply to interest on debt incurred (and, in certain cases, refinanced) after November 2, 2017.

b) The Senate Bill would eliminate the itemized deduction for interest on home equity indebtedness. It appears that the itemized deduction for mortgage interest incurred on acquisition indebtedness would remain unchanged. Under the Senate Bill, the provision would be effective for taxable years beginning after December 31, 2017.

9. Changes to the medical expense itemized deduction. (Both House and Senate Bills, with differences described below) Currently, taxpayers may take an itemized deduction for out-of-pocket medical expenses of the taxpayer, a spouse, or a dependent, subject to a floor of 10% of the taxpayer’s AGI.

a) As currently drafted, the House Bill would repeal this deduction. This elimination would be effective for tax years beginning after December 31, 2017.

b) The Senate Bill would temporarily reduce the medical expense deduction floor from 10% to 7.5% (effectively expanding the available deduction).  The provision would be effective for taxable years beginning after December 31, 2016 and ending before January 1, 2019.

10. Eliminate or limit itemized deductions for various types of state and local taxes. (Both House and Senate Bills) Currently, taxpayers may take an itemized deduction for either: (1) state and local income taxes, or (2) state and local sales taxes. Additionally, taxpayers may currently take an itemized deduction for real estate and personal property taxes. Both the House and Senate Bills would eliminate the current itemized deduction for state and local income or sales taxes. The House and Senate Bills would also generally eliminate the itemized deduction for personal property taxes and would limit the itemized deduction for real property taxes to $10,000 ($5,000 in the case of a married individual filing a separate return). These eliminations and limitations under both Bills would be effective for tax years beginning after December 31, 2017.

11. Eliminate the unreimbursed employee business expense miscellaneous itemized deduction. (Both House and Senate Bills) Currently, taxpayers may claim unreimbursed trade or business related expenses incurred as an employee as a miscellaneous itemized deduction, subject to a floor of 2% of the taxpayer’s AGI. As currently drafted, both the House and Senate Bills would eliminate this deduction. This elimination would be effective for tax years beginning after December 31, 2017. If the deduction were to be eliminated, it would increase the significance of reimbursing employees for business expenses under an accountable plan.

12. Increase the limitation for cash contributions to public charities and certain private foundations. (Both House and Senate Bills) Currently, donors may generally take an itemized deduction for charitable contributions of cash made to public charities, private operating foundations, and certain private non-operating foundations up to 50% of the donor’s AGI. As currently drafted, both the House and Senate Bills increase this limitation to 60% of the donor’s AGI. Other limitations continue to apply for gifts of certain noncash property and for contributions to most private non-operating foundations. This change would be effective for tax years beginning after December 31, 2017. Both Bills continue to allow a 5-year carryover for contributions exceeding the 60% AGI limitation.

13. Adjust the charitable mileage rate. (House Bill) Currently, for purposes of computing the charitable deduction for the use of an automobile, the standard charitable mileage rate is fixed by statute at 14 cents per mile. The House Bill indicates that the rate shall take into account the variable cost of operating an automobile. The specific impact of this change has not been determined. The change would be effective for tax years beginning after December 31, 2017.

14. Repeal the exclusion for employer-provided educational assistance programs. (House Bill) Under current law, employer-provided educational assistance to employees under an educational assistance program is excluded from the employees’ taxable income up to a limit of $5,250 per year. The House Bill would repeal this exclusion. This provision would be effective for tax years beginning after December 31, 2017. Note that the House Bill does not eliminate the exclusion for amounts paid or reimbursed by an employer for education that maintains or improves skills required for the individual’s employment or meets the express requirements of the employer.

15. Eliminate the exclusion for employer-provided adoption assistance programs. (House Bill) The House Bill would eliminate the current exclusion from employees’ income for amounts paid or expenses incurred by employers for qualified adoption expenses in connection with the adoption of a child by an employee under a written, adoption assistance program, subject to dollar and income limitations. As the House Bill is currently drafted, amounts paid by employers to employees under qualified adoption assistance programs would be included in employees’ gross income. This elimination would be effective for tax years beginning after December 31, 2017.

16. Eliminate the exclusion for employer-provided dependent care assistance programs. (House Bill) The House Bill, as amended, would eliminate the current exclusion from employees’ income for amounts paid by employers for dependent care assistance provided to employees. This elimination would be effective for tax years beginning after December 31, 2022.

17. Eliminate the deduction for moving expenses and the qualified moving expense reimbursement exclusion. (Both the House and Senate Bills) Currently, taxpayers may claim a deduction for certain moving expenses incurred in connection with starting a new job. Additionally, taxpayers may currently exclude from income employer-paid qualified moving expense reimbursements. As currently drafted, both the House and Senate Bills would eliminate the moving expense deduction and the qualified moving expense reimbursement exclusion. Under the House Bill, as amended, and the Senate Bill, an exception would exist for moving expenses of members of the Armed Forces of the United States (or their spouses or dependents). These eliminations would be effective for tax years beginning after December 31, 2017.

18. Modify the net operating loss deduction rules. (Both the House and Senate Bills, with differences described below)

a) The House Bill would eliminate the net operating loss (“NOL”) 2-year carryback period, with an exception for certain disaster losses, and would create an indefinite NOL carryforward period. The House Bill would annually increase the indefinite NOL carryforward amount by an interest factor. Additionally, the House Bill would generally limit the allowable NOL deduction to 90% of taxable income.

b) The Senate Bill would eliminate the NOL 2-year carryback period, with an exception for certain farming losses and certain insurance company losses, and would also create an indefinite NOL carryforward period. The Senate Bill does not contain a provision which increases the indefinite NOL carryforward amount by an interest factor. As in the House Bill, the Senate Bill would also limit the allowable NOL deduction to 90% of taxable income (80% of taxable income in taxable years beginning after December 31, 2022).

Under both Bills, the indefinite carryforward period would be effective for NOLs arising in taxable years beginning after December 31, 2017, and the NOL deduction limitation would apply to taxable years beginning after December 31, 2017.

19. Increase the estate tax exemption (both House and Senate Bills, with difference described below) and eventually repeal the estate tax (House Bill). Under current law, property of a decedent’s estate is generally subject to an estate tax, with an exemption of approximately $5 million.

a) The House Bill would increase the exemption to approximately $10 million, indexed for inflation, for tax years beginning after December 31, 2017. Additionally, the House Bill would repeal the estate tax for years beginning after December 31, 2023.

b) The Senate Bill would increase the exemption to approximately $10 million, indexed for inflation occurring after December 31, 2011. The increased exemption would be effective for taxable years beginning after December 31, 2017.

This increased exemption under both Bills would eliminate the estate and gift tax incentive associated with bequests to nonprofit organizations for most taxpayers (other than those with high-value estates). Repeal of the estate tax would eliminate the estate tax incentive associated with charitable bequests for all taxpayers.

20. Terminate the new markets tax credit. (House Bill) Under current law, certain qualifying taxpayers may claim a tax credit (called the “new markets tax credit”) for investments in qualified community development entities which generally serve low-income communities and individuals. Under the House Bill, no additional new markets tax credits will be allocated after December 31, 2017.

21. Eliminate the deduction for the cost of certain fringe benefits provided to employees, and eliminate the deduction for entertainment expenses. (Both House and Senate Bills, with limited differences not applicable to most taxpayers) Both the House and Senate Bills would eliminate deductions for entertainment, amusement or recreation activities, facilities (including on-premises gyms and other athletic facilities), or membership dues relating to such activities or other social purposes. The Bills would also eliminate the deduction for transportation fringe benefits (including parking) provided to employees. Under both Bills, the deduction for meal expenses would generally be limited to 50%. Under both the House and Senate Bills, the provisions above would be effective for amounts paid or incurred after December 31, 2017.  Additionally, under the Senate Bill, the deduction for employer-operated eating facilities and meals provided for the convenience of the employer would be eliminated effective for amounts paid or incurred after December 31, 2025.

22. Impose an excise tax on certain executive compensation. (Both House and Senate Bills) Under both the House and Senate Bills, a nonprofit organization would be subject to a 20% excise tax on compensation in excess of $1 million (and on certain excess compensation payments contingent upon separation from employment) paid to any of its five highest paid employees during the year, including former employees. Compensation includes cash wages as well as the cash value of benefits (except for payments to certain retirement plans), and includes compensation from related organizations and government entities. Notably, the definition of wages used in the current drafts of the Bills does not appear to include wages for services performed by a duly ordained, commissioned, or licensed minister of a church in the exercise of his/her ministry or by a member of a religious order in the exercise of duties required by such order. [Effective for tax years beginning after December 31, 2017.]

23. Assess an excise tax on the net investment income of certain private colleges and universities. (Both House and Senate Bills) Both the House and Senate Bills would assess a new excise tax of 1.4% on the net investment income of certain private colleges and universities with large endowments or investment portfolios. The House Bill, as amended, and the Senate Bill also clarify that, under this provision, assets and net investment income would include amounts of an organization that is related to the private college or university. This provision would be effective for tax years beginning after December 31, 2017.

24. Modify private foundation excess business holding rules. (House Bill) The House Bill would create a very limited exception from the excess business holding prohibition for private foundations. This would be effective for tax years beginning after December 31, 2017.

25. Add additional reporting requirements for donor advised fund sponsoring organizations. (House Bill) The House Bill would require donor advised funds to report their average percentage payout annually and to disclose certain policy information. This change would be effective for returns filed for tax years beginning after December 31, 2017.

26. Simplify the excise tax rate on private foundation investment income. (House Bill) Under the House Bill, the excise tax on net investment income would be assessed at a single rate of 1.4% rather than the current two-tier system (with rates of either 1% or 2%, depending on the average level of distributions made during the previous five years.) This provision would be effective for tax years beginning after December 31, 2017.

27. Treat certain fringe benefits provided by nonprofit entities to their employees as unrelated business taxable income. (House Bill) Under the House Bill, nonprofit entities would be taxed on the value of providing their employees with transportation fringe benefits, parking facilities used in connection with qualified parking, and on-premises gyms and other athletic facilities, by treating the funds used to pay for such benefits as unrelated business taxable income. This provision would be effective for amounts paid or incurred after December 31, 2017.

28. Eliminate private activity tax-exempt bond financing for §501(c)(3) projects. (House Bill) The House Bill would eliminate private activity tax-exempt bond financing. According to bond counsel with whom we have communicated, these provisions would eliminate the ability for §501(c)(3) organizations to obtain new tax-exempt bond financing to fund projects. These provisions would be effective for bonds issued after December 31, 2017.

29. Prohibit the offsetting of unrelated business income with losses generated from separate unrelated business activities. (Senate Bill) Under current law, nonprofits that conduct more than one unrelated business activity may offset income generated by one unrelated business activity with losses generated by another unrelated business activity. The Senate Bill, as currently drafted, would require nonprofits with more than one unrelated trade or business to calculate the unrelated business taxable income separately with respect to each trade or business, thereby prohibiting nonprofits from offsetting unrelated business income from an unrelated business activity with losses generated from a separate unrelated business activity. Under the Bill, a net operating loss deduction would only be allowed with respect to the trade or business from which the loss arose. This provision would be effective for taxable years after December 31, 2017.

30. Eliminate the Affordable Care Act (ACA) individual shared responsibility payment. (Senate Bill, as modified) The Senate Bill would reduce the ACA individual shared responsibility payment to zero. This provision would be effective with respect to health coverage status for months beginning after December 31, 2018.


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