How are Nonprofits Affected by The Tax Cuts and Jobs Act?

After a lengthy process, Congress and the President did what they had to do in late December 2017 to put into law one of the most significant pieces of legislation in decades: the Tax Cuts and Jobs Act (TCJA). The Act put into place a number of provisions that will affect Not for Profit Organizations. Note the following areas of tax impact that the provisions of the TCJA  brought in relation to Not For Profit Organizations, as noted in Yeo Yeo:

  • Changes the computation of unrelated business taxable income (UBIT) if an organization has more than one unrelated trade or business. It’s possible that more nonprofits will have to pay UBIT. As Nolo explains:

Subject to numerous exceptions and emptions, tax-exempt nonprofits that operate businesses unrelated to their charitable mission must pay an unrelated business income tax (UBIT) on their net unrelated business income. Under prior law, a nonprofit that operated multiple unrelated businesses could deduct the losses from one business from the profits from another to determine the amount of net unrelated business income subject to UBIT. The TCJA does not allow this. Starting in 2018, each unrelated business must determine its net income without regard to losses from other unrelated businesses. As a result, it’s likely that more nonprofits will have to pay UBIT.

  • Increases UBIT by the amount of certain fringe expenses for which a deduction is disallowed.
  • Imposes a 21% excise tax on compensation of over $1 million for the five highest paid employees.
  • Imposes a 1.4% excise tax on net investment income of private colleges.
  • Modifies the rules for charitable contributions:
    • Repeals the special rule in Code Sec. 170(l) that provides a charitable deduction for the amount paid for the right to purchase tickets for athletic events;
    • Repeals the Code Sec. 170(f)(8)(D), effectively ensuring that donee organizations will not be allowed or required to report details of donations of $250 or more
    • Increases the 50% limitation under Code Sec. 170(b) for cash contributions to public charities and certain private foundations to 60%;

Will the TCJA Dampen Charitable Giving or Stimulate It?

One point of view, usually the side that is broadly opposed to the TCJA, makes the case the TCJA will hurt charitable giving because, among other things, it provides to taxpayers such a huge increase for standard deductions. PJ News sums this point of criticism up as follows:

The Act roughly doubles the standard deduction for individuals ($12,000 for individuals and $24,000 for joint filers) and generally lowers individual income tax rates across the board. The Act also places an annual limitation on the state and local tax deduction at $10,000 (for both individual and joint filers). These income tax changes are scheduled to remain in effect through 2025. Doubling the standard deduction makes it much more likely that fewer people will itemize their deductions. Because a taxpayer must itemize deductions in order to obtain any income tax benefit by making a charitable contribution, a taxpayer not itemizing deductions receives no tax benefit from such a contribution. Capping the state and local tax deduction also makes it more likely that the standard deduction will be used. Even for those who will still itemize, the lower income tax rates reduces the value of the charitable deduction because with lower tax rates, less taxes are saved by taking a charitable deduction than before the Act.

An opposing point of view from the Washington Examiner makes the case that the tax cuts will actually stimulate charitable giving as income and financial resources increase as a result of the tax cuts:

The thrust of the Left’s argument is that allowing Americans to keep more of their money makes them stingier, and high taxes are needed to force Americans to take advantage of charitable tax write-offs.

It’s ironic that anyone in the nonprofit sector, which is built entirely on the generosity of individuals and corporations, can argue that higher taxes encourage charity – or that charity needs to be legislated.

This argument has no basis in economic reality, either. According to Giving USA, which tracks charitable donations, philanthropy has grown rapidly since it bottomed out during the Great Recession. Giving rose to a new high of $390 billion in 2017 largely thanks to individuals, whose giving increased nearly four percent in 2016. Giving USA also notes that donations grew substantially in 2014 and 2015 likely due to two factors: “The country’s overall economic environment continuing its path to recovery after recessionary times, and household finances seeming to stabilize.”

No matter which “side” you take, whether you agree with PJ News or the Washington Examiner, here are five steps nonprofits should take now to tackle tax reform:

  1. Assess impact. Tax professionals will likely need to review the law to measure their organization’s specific circumstances against it to assess the impact of each provision, as well as the holistic effect on their bottom line.
  2. Assemble a team. While the heaviest burden may fall on accountants, companies and their finance teams will have an important role to play to gather all the necessary data.
  3. Dig into the data. Assessing the impact of tax reform requires a substantial amount of data to be readily available. Nonprofits need to move from modeling the impact of tax reform to focus on data collection and computations as soon as possible.
  4. Establish priorities.  Focus on the areas that could have the greatest impact on your organization.
  5. Initiate tax reform conversations with your tax advisor.  Tax reform of this magnitude is the biggest change we’ve seen in a generation, and will require intense focus to understand not only how the changes apply at a federal level, but also how to navigate the ripple effect this is likely to have on state taxation as well.