The proposed Tax Cuts and Jobs Act was released on Thursday, November 2nd by the House Committee on Ways and Means. This proposed act is 429 pages long and will undoubtedly undergo revisions in the House before completion. A marathon mark-up began in the Ways and Means Committee this week and a substantive number of amendments are expected. In addition, a Senate bill is expected later in November, so how this relates to any final completed bill is unknown. If enacted as-is, the proposals would generally take effect in 2018.
Some initial thoughts on the proposed bill:
Disincentives to charitable giving—we have written before about the negative effect the doubling of the standard deduction may have on charitable giving by decreasing the number of tax filers who itemize their deductions and get a tax benefit of a charitable gift. This problem exists and is probably made worse by curtailing or eliminating a number of other itemized deductions, including:
- State and local income taxes paid deductions would be eliminated.
- Local property tax deductions would only be allowed up to $10,000.
- Mortgage interest deductions would be more limited than under current law.
A host of other itemized deductions such as: employee business expenses, casualty, and medical expenses, will also be repealed. It would appear that very few taxpayers would itemize their deductions under the new plan.
In addition, changes are proposed to the estate tax that will further reduce the number of estates that would pay the tax by immediately doubling the current exemption for individuals to $11 million and it is proposed to be repealed entirely after 2023. This would clearly reduce tax incentives for bequests.
Other key changes proposed for charitable contributions include:
- Increasing the percentage of adjusted gross income allowed as a charitable deduction from 50% to 60% for cash gifts to public charities.
- Eliminating the special 80% deduction for gifts made to colleges securing the right to obtain seating at athletic events—this could have a definite negative impact on college athletic giving.
- Adjusting for inflation the charitable mileage rate for amounts driven in service to a charitable organization.
- Repealing the substantiation exception for gifts reported by donee organizations.
Other Proposed Changes Affecting Nonprofits—Under the proposal, tax-exempt entities would be taxed on the values of providing their employees with transportation fringe benefits, and on-premises gyms and other athletic facilities, by treating the funds used to pay for such benefits as unrelated business taxable income, thus subjecting the values of those employee benefits to a tax equal to the corporate tax rate (which will be lowered in the proposal). Additional proposed changes include:
- Terminating new markets tax credits after 2017, which certain nonprofits employ to help finance new construction projects.
- Changing non-qualified deferred compensation—it appears to only effect 457b plans not 457f plans.
- Creating a 20% excise tax on compensation in excess of $1 million paid to any of a tax-exempt organization’s five highest paid employees for the tax year. The excise tax would apply to all remuneration paid to a covered person for services—including cash and the cash value of all remuneration (including benefits)—paid in a medium other than cash, except for payments to a tax-qualified retirement plan, and amounts that are excludable from the executive’s gross income. Once an employee qualifies as a covered person, the excise tax would apply to compensation in excess of $1 million paid to that person so long as the organization pays him/her remuneration. The excise tax also would apply to excess parachute payments paid by the organization to such individuals. Under the provision, an excess parachute payment generally would be a payment contingent on the employee’s separation from employment with an aggregate present value of three times the employee’s base compensation or more. These proposals are meant to correlate nonprofit executive compensation to the corporate world where compensation above $1 million is not tax deductible.
- Extending UBIT to all 501(a) entities (including pension plans) and permits exclusion from UBIT for research income only if the research is made publicly available.
- Allowing private foundations to wholly own for-profit businesses when received by gift or bequest so that the profits of such businesses can be dedicated to funding the private foundations charitable mission.
- Repealing the Johnson Amendment as it relates to certain churches that make statements relating to political campaigns in the ordinary course of their activities.
- Creating a new 1.4% excise tax rate on private foundations’ net investment income (eliminating the current two-tiered structure).
- Imposing a 1.4% excise tax on private colleges and university (not public or state colleges) endowments for institutions that have at least 500 students and assets (other than those used directly in carrying out the institutions educational purposes) valued at $100,000 or more per full-time student.
- Requiring donor-advised funds to disclose—annually—the average amounts of grants made from their funds as well as their policies on inactive funds.
This is an important issue for the charitable sector that Aronson will continue to monitor. For more information on how the Tax Cuts and Jobs Act could potentially affect charitable organizations, please contact Craig Stevens at 301.231.6265 or CStevens@aronsonllc.com.