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‚ÄčTax Reform Update for Nonprofits

By Aaron M. Fox, CPA - Senior Tax Manager at Raffa, P.C.

‚ÄčThe 115th Congress of the United States of America is expected to soon pass H.R. 1, the Tax Cuts and Jobs Act. The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses as well as several provisions impacting tax-exempt organizations. Two different versions of the bill passed in the Senate and House of Representatives in recent weeks, and after differences in the bills were reconciled in the Congressional conference committee, a final Conference Agreement version of the bill passed both chambers of Congress. The bill is expected to be signed into law by the President by the end of the week. In order to keep you apprised of these developments on Capitol Hill that may affect you and your organization, see below for a summary of some of the issues concerning tax-exempt organizations:

General Changes for Tax-Exempt Organizations

  • Compensation: A provision will levy a 21% excise tax on tax-exempt organizations with employees earning compensation in excess of $1 million per year, effective for tax years beginning after December 31, 2017.
  • Charitable Contribution Deductibility: While donors who itemize deductions may be able to deduct charitable contributions up to 60% (increased from 50%) of their adjusted gross income, the increase of the standard deduction to $12,000 if single; $24,000 if married, along with the decrease of state and local tax, mortgage interest, and other deductions could significantly decrease the number of donors who itemize deductions. This may have a negative impact on charitable contribution giving in 2018 and beyond.
  • Fringe Benefits: Tax-exempt organizations providing fringe benefits such as qualified transportation, qualified parking, or any on-premises athletic facility for employees may be subject to unrelated business income tax by the amount paid or incurred by the organization for such benefits.

Tax-Exempt Organizations Engaging in Unrelated Business Activity

  • Corporate Tax Rate: The corporate tax rate will be a 21% flat rate effective for tax years beginning after December 31, 2017.
  • Unrelated Business Income: The Act includes a provision to mandate calculating net unrelated business taxable income separately for each unrelated trade or business activity. Losses derived from one unrelated business will not be allowed to offset income from another unrelated business activity.
  • Net Operating Losses: The Act repeals net operating loss carrybacks while extending the term for net operating loss carryforwards to an indefinite length. Net operating loss carryforwards arising in taxable years after December 31, 2017 will be limited to 80% of taxable income.
  • AMT: The corporate alternative minimum tax will be removed for tax years beginning after December 31, 2017.

If you have any questions or need clarification as to how the Tax Cuts and Jobs Act may impact your organization, feel free to reach out to Frank Smith at fsmith@raffa.com or aaron fox at afox@raffa.com.