As we posted, the U.S. House of Representatives and the U.S. Senate passed and sent to the President for signature legislation that makes significant changes to the U.S. tax code. The changes are the broadest re-write of the U.S. tax code since the 1986 act and could have a widespread impact on tax-exempt organizations and charitable giving. The following is a very brief summary of the rules impacting exempt organizations and charitable giving:
Rules Impacting Charitable Donations
- Increase in AGI Limit. The income-based percentage limit for charitable cash contributions by individuals to public charities increases from 50 percent to 60 percent of Adjusted Gross Income (“AGI”).
- Itemized Deductions. The standard deduction is increased from $6,350 to $12,000 for singles and from $12,700 to $24,000 for married couples filing jointly. Thus, fewer individuals will be itemizing deductions, which includes charitable deductions. Many commentators have speculated this increase in the standard deduction will have a negative impact on charitable giving since for many individuals, they will no longer receive a tax benefit for their charitable contribution. That said, other commentators believe charitable giving will remain the same or increase, arguing that most individuals donate because they believe in the cause, feel a moral obligation, and/or individuals will have more to donate because their overall tax burden is less.
- Estate Tax Exemption. The gift and estate tax exemption is increased beginning January 1, 2018, from $5,000,000 per person to $10,000,000, indexed for inflation. For 2018, this equals $11,200,000 for individuals and $22,400,000 for married couples. Because charitable contributions are deductible for gift and estate tax, the increase in the exemption reduces the tax incentive for charitable giving for estates now under the exemption.
Rules Impacting Tax-Exempt Organizations
- Excise Tax on Compensation. A 21% tax is imposed on remuneration paid by an organization exempt from federal income tax under Section 501(a) to a “covered employee” in excess of $1 Million plus any “excess parachute payment” paid to a covered employee. We will provide more detail on this new law soon.
- Excise Tax on Investment Income of Private Colleges and Universities. A 1.4% excise tax is imposed on the net investment income of an “applicable educational institution” which (a) had at least 500 students during the preceding tax year, (b) more than 50% of the students of which are located in the U.S., (c) which is not a State college or university, and (d) the aggregate fair market value of the assets of which at the end of the preceding taxable year (other than those used directly in carrying out exempt purposes) is at least $500,000 per student. We will provide more detail on this new law soon.
- Unrelated Business Income. Unrelated business taxable income must be computed separately with respect to each trade or business and taxable income with respect to any trade or business cannot be less than zero.
- Unrelated Business Income. Unrelated business taxable income shall be increased by any amount for which a deduction is not allowable by reason of Section 274 which is paid for any qualified transportation fringe, parking facility used in connection with qualified parking, or any on-premises athletic facilities.
- Repeal of Deduction for College Seating Rights. The deduction for amounts paid in exchange for college athletic event seating rights is repealed.
- Repeal of Substantiation Exception. An exception to the donor substantiation rules under Section 170(f)(8)(D) which provided the substantiation requirement did not apply if the donee charity filed a return that included disclosure of the necessary information is repealed.
- Tax-Exempt Bonds. The exclusion from gross income for interest on a bond issued to advance refund another bond (so-called “advance-refund” tax-exempt bonds) is repealed. In other words, advance-refund tax-exempt bonds will lose their tax-exempt status.
Proposals that did not make it into the new law
We did want to note a few proposed provisions in the House Bill or Senate Bill that did not make it into the new law, including the following:
- FIFO Basis Rule. A provision in the Senate Bill would have required taxpayers to use the first-in first-out (“FIFO”) method to determine the cost in connection with any sale or disposition of stock. Many commentators argued this FIFO rule would likely have had a negative impact on charitable donations.
- Political Campaign Activities. A provision in the House Bill would have removed the absolute prohibition on Section 501(c)(3) organizations to engage in political campaign activities.
- Excess Business Holdings Rule. A provision in the House Bill would have added an exception to the excess business holdings rules applicable to private foundations to allow additional ownership interests in a business enterprise that met an ownership requirement, an “all profits to charity” distribution requirement, and an independent operation requirement.
- Excise Tax on Investment Income. A provision in the House Bill would have reduced the excise tax under Section 4940 on a private foundation’s net investment income from 2% to 1.4%.
- Private Museums. A provision in the House Bill would have provided an organization operating an art museum will qualify as a private operating foundation only if the organization is open during normal business hours to the public for at least 1,000 hours during the taxable year.
- Tax-Exempt Bonds. A provision in the House Bill would have repealed the exception from the exclusion from gross income for interest paid on qualified private activity bonds.
- Unrelated Business Income. A provision in the House Bill clarified an organization does not fail to be subject to tax on unrelated business income solely because the organization is also exempt under another provision of the Code.
- Unrelated Business Income. A provision in the House Bill would have modified the exclusion of income from research to only exclude income from fundamental research the results of which were freely available to the general public.
- Donor Advised Funds. A provision in the House Bill would have required a sponsoring organization to report additional information regarding grants and distributions from donor advised funds.