On December 20, 2017, Congress enacted H.R.1 “Tax Cut and Job Act” which includes significant changes to the tax code and was signed by President Trump on December 22, 2017. The following are some of the important changes enacted by this tax act that will have significant
effects on most tax-exempt organizations.
- Starting right away, the new tax act increases the percentage limitation for cash contributions to 60 percent of adjusted gross income (“AGI”) from 50 percent on contributions made to public charities.
- Disallows a charitable contribution deduction for payments made to a College or University for the purchase of tickets to athletic events.
Executive Compensation – New Excise Tax Paid by Exempt Organization Employer
- Compensation over $1 million and certain excess parachute payments – the new tax law imposes a new excise tax equal to the new corporate tax rate of 21 percent on executive compensation of over $1 million and certain excess parachute payments paid by exempt organizations to their top five highest-paid employees. A last-minute exception was included in the legislation for licensed medical professionals, including medical doctors, nurses and veterinarians.
- The following categories of Exempt Organizations are subject to this new excise tax:
- All organizations exempt from taxation under § 501(a) including § 501(c)(4) social welfare organizations § 501(c)(5) labor unions and § 501(c)(6) trade associations.
- State colleges, universities and other organizations with income excluded under IRC § 115(1)
- Political organizations exempt under § 527(e)(1).
- Farmers’ cooperatives exempt under § 521(b)(1).
Education Related Provisions
- Imposes a 1.4 percent excise tax on net investment income, also known as endowment earnings, of Private Colleges and Universities that have (i) at least 500 tuition-paying students, (ii) more than half of whom are located in the U.S., and (iii) assets valued at the close of the preceding tax year of at least $500,000 per full-time student. The asset value does not include assets used directly in carrying out the educational institution’s purpose. Also, for this purpose, the number of students at a location is based on the daily average number of full-time students attending the institution, with part-time students being taken into account on a full-time student equivalent basis.
- Allows for a Section 529 plan account to cover up to $10,000 of tuition at an elementary or secondary public, private or religious school and certain home school expenses.
Unrelated Business Income Tax (UBIT)
- Each type of trade or business must compute unrelated business income tax separately under the new tax law. Net operating losses generated from one business line are not allowed to reduce the income of another business line.
- Limits the UBIT exclusion for fundamental research to income from research that is freely available to the public.
- Certain fringe benefits provided by organizations for employees, such as parking, on-site gyms and transportation, will now be included in UBIT.