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Federal Tax Bill Recap for Tax Exempt Sector and Donors Federal Tax Bill Recap for Tax Exempt Sector and Donors

Federal Tax Bill Recap for Tax Exempt Sector and Donors

Over the weekend, the Senate passed its final version of the tax reform bill. The House of Representatives passed its version of the bill last month, and the two chambers will now come together in conference to agree upon a final bill for comprehensive tax reform. Congress has indicated that it intends to pass a final version of the bill before year-end. While there are some variations between the two bills, many of the provisions are the same. See a comprehensive chart of the two bills here. There is still some uncertainty about which provisions will be included in a final bill, but below is a brief overview of the key tax reform changes in each bill that may impact tax-exempt organizations and individuals contributing to charity. Unless otherwise noted, all of the provisions below apply to taxable years beginning after Dec. 31, 2017.
The following provisions appear in both the House and Senate versions of the bill:
  • Significantly increases the standard deduction (House Version: $24,400 for a joint return; Senate Version: $24,000) and repeals the personal exemption for individuals and families. This has the potential to dramatically reduce the number of taxpayers who itemize their deductions, because a taxpayer would only do so if itemized deductions exceed the standard deduction. (Note: The Senate bill will sunset after Dec. 31, 2025).
  • Increases the estate and gift tax exclusion from $5,000,000 to $10,000,000 (with inflation adjustments). (Note: The House bill will fully repeal the estate tax after Dec. 31, 2024 (while retaining step-up in basis); the Senate bill will sunset after Dec. 31, 2025).
  • Increases the generation-skipping transfer tax exclusion from $5,000,000 to $10,000,000 (with inflation adjustments). (Note: The House bill will fully repeal the generation-skipping transfer tax after Dec. 31, 2024; the Senate bill will sunset after Dec. 31, 2025).
  • Increases the adjusted gross income limitation on an individual’s charitable contribution deduction from 50% to 60%. (Note: The Senate bill will sunset after Dec. 31, 2025).
  • Imposes a 20% excise tax, paid by the employer, on the excess executive compensation of certain tax-exempt organizations. The tax applies to the amount of compensation (including parachute payments) paid to any of an organization’s five highest-compensated employees in excess of $1,000,000. Applicable tax-exempt organizations include organizations exempt from tax under sections 501(a) (including all 501(c) organizations), 521(b)(1), 115(1), and 527(e)(1). Compensation does not include any employer contributions to a Roth account, but it does include amounts paid by any related organizations. (Note: This provision applies to the five highest-compensated employees of an organization beginning after 2016, even if they are no longer employed by the organization).
  • Repeals the federal exemption on the interest bondholders currently receive on advance refunding bonds. An advance refunding bond is a bond that is issued more than 90 days prior to the redemption of the refunded bond. Under current law, tax-exempt bonds can be used to advance refund another bond as long as the issuer complies with certain advance refunding restrictions.
  • Imposes a 1.4% excise tax on the net investment income of private colleges and universities and their related organizations that: (1) have at least 500 students; and (2) have assets (not including assets used directly in carrying out the institution's exempt purpose) with an aggregate fair market value of at least $250,000 per full-time student at the end of the preceding year. (Note: The Senate bill provides that assets and net investment income of a related organization that is not controlled by the institution will only be treated as net investment income of the institution if the income is intended or available for the use or benefit of the institution, the aggregate fair market value of the assets must be at least $500,000 per full-time student and schools that do not participate in federal financial aid programs are exempt).
  • Prevents new contributions from being made into Coverdell education savings accounts, but allows Coverdell education savings accounts to be rolled over into qualified tuition programs. Qualified higher education expenses for purposes of a qualified tuition program will include tuition of an elementary or secondary school student at a public, private, or religious school, with a limit of $10,000 per year per beneficiary. (Note: The House bill provides that books, supplies, and equipment required for a registered apprenticeship program will also be treated as qualified higher education expenses).
  • Allows distributions from qualified tuition programs to be rolled over to an ABLE account of the designated beneficiary or a family member of the designated beneficiary. (Note: The Senate bill only allows distributions if the designated beneficiary or his or her family member owns the ABLE account, and the provision would sunset before Jan. 1, 2026).
  • Disallows a deduction for any amount paid for college athletic event seating rights.
  • Repeals the exception that does not require substantiation by individuals for deductions of amounts over $250 if the contribution was reported by the donee.
The following provisions appear only in the House version of the bill:
  • Repeals tax-exempt status for private activity bonds. Private activity bonds are tax-exempt bonds permitted under current law to be issued to finance projects for section 501(c)(3) organizations like hospitals, senior living facilities, cultural institutions, and private colleges and universities.
  • Exempts certain private foundations from the excise tax on excess business holdings if they can establish the requirements for independently-operated philanthropic business holdings: (1) 100% of the stock is held by the private foundation; (2)  the stock was not acquired by purchase; (3) all profits are distributed to the private foundation not later than 120 days after the close of the year; and (4) the business enterprise’s shareholders and directors are not substantial contributors to the private foundation and do not make up a majority of the private foundation’s board of directors.
  • Provides a reduced 1.4% excise tax rate on all net investment income of private foundations. Previously, the rate was 2%.
  • Allows 501(c)(3) organizations to make political statements without jeopardizing tax-exempt status as long as the statement is made: (1) in the ordinary course of the organization’s regular activities in carrying out its exempt purpose; and (2) results in the organization incurring only de minimis expenses. (Note: This provision applies to taxable years beginning after Dec. 31, 2018 and will sunset after Dec. 31, 2023).
  • Repeals various provisions related to education, including: deductions for interest paid on student loans and qualified tuition and related expenses, exclusions from gross income for interest on US savings bonds used to pay higher education expenses, amounts paid by an employer for educational assistance pursuant to a qualified program, and amounts paid by educational institutions under a qualified tuition reduction program.
  • Clarifies that all tax-exempt organizations, including public pension plans and other state and local entities that are exempt as government-sponsored entities, are subject to the unrelated business income tax.
  • Requires tax-exempt organizations to include in unrelated business taxable income the value of certain fringe benefits provided to employees, including: entertainment expenses, qualified transportation fringe benefits, any parking facility used in connection with qualified parking, or any on-premises athletic facility.
  • Only income derived from research that is made freely available to the general public will be excluded from unrelated business taxable income.
  • Modifies the charitable mileage rate of an automobile for deductions by adjusting it for inflation. Previously, the charitable mileage rate was 14 cents per mile.
  • Only allows art museums to qualify as private operating foundations if the museum is open to the public during normal business hours for at least 1,000 hours during the taxable year.
  • Requires donor advised fund sponsoring organizations to annually disclose on tax returns: (1) the average amount of grants made during that year (as a percentage of assets held); and (2) whether the organization has a policy with respect to donor advised funds on frequency and minimum level of distributions. Organizations should include a copy of any such policy with its tax return.
  • Includes interest on bonds used for financing the construction of (or capital expenditures for) a professional sports stadium as gross income. Professional sports stadiums include a stadium or arena used for professional sports exhibitions, games, or training at least five days during the taxable year. (Note: This provision applies to bonds issued after Nov. 2, 2017).
  •  Simplifies the American Opportunity Tax Credit to allow for a 100% tax credit of the first $2,000 of higher education expenses and a 25% credit of the next $2,000 of expenses, with a total allowable credit of $2,500. The credit will begin to phase out for taxpayers with a modified AGI of $80,000 or above and is only allowable for the first 5 years of postsecondary education. In the fifth year of postsecondary education, the rate of the credit is reduced to 50% and 12.5% of expenses, respectively. Up to 40% of the credit is potentially refundable for taxpayers. In order to claim the credit, the taxpayer must prove a taxpayer identification number on their tax return.
  • Provides that income from the discharge of student loan indebtedness due to death or total and permanent disability of the student is not includible as gross income.
The following provision appears only in the Senate version of the bill:
  • Provides that if an organization has more than one unrelated trade or business, unrelated business taxable income will be computed separately for each trade or business. The $1,000 deduction when calculating unrelated business taxable income will apply to the sum of all activities.

Please contact any of the following members of our Tax Exempt Organizations Team to discuss how these provisions may impact your organization: Gina Giacone, Matt Ehinger, Shelby AndersonSterling Shown or Ryan Waggoner.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.

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