On December 20, 2017, Congress passed the Tax Cuts & Jobs Act (TCJA), which now awaits President Trump’s signature. Among many changes that the TCJA will bring to current federal tax law, several will affect tax-exempt, nonprofit organizations. Here is a brief overview of some of the most important ones:
Excise Tax on High Compensation
A tax-exempt organization will be liable for an excise tax, levied at the new corporate rate of 21 percent, on the amount of total remuneration exceeding $1 million that it pays to any of the organization’s five highest paid employees (a “covered employee”). This tax is effective for years beginning after December 31, 2017.
- Remuneration does not include the value of most types of tax-favored retirement plans such as 401(a), 403(b) and 457(b) plans, or the value of group term life insurance premiums or health insurance plan benefits
- Remuneration does include the value of 457(f) plans once vested, even if not yet paid
- Certain separation payments are included in the calculation of total remuneration
- Remuneration paid to former employees is subject to the excise tax if the former employee was a covered employee in any year beginning after December 31, 2016
- Remuneration from certain related organizations is aggregated for purposes of calculating an employee’s total remuneration. Related organizations are ratably liable for their allocable portions of the 21 percent excise tax
- Remuneration does not include payments to licensed doctors, nurses and veterinarians for their performance of medical or veterinary services
Tax on Net Investment Income of Private Colleges and Universities
Private colleges and universities with at least 500 students and with assets equivalent to at least $500,000 per student will now be subject to a 1.4 percent excise tax on their net investment income.
- Assets used directly for educational purposes are not included in the calculation. Essentially, the calculation is based on the value of a university’s endowment
- Assets of a related organization (e.g., a supporting organization) generally must be aggregated with those of the college or university for purposes of calculating the fair market value of assets
- If at least 50 percent of a university’s students are located outside the United States, the tax does not apply
Unrelated Business Taxable Income
Exempt organizations are no longer permitted to offset revenue from one unrelated trade or business with expenses from a different unrelated trade or business.
The standard deduction has nearly doubled, for both single and married taxpayers filing jointly.
- The standard deduction increased for single taxpayers from $6,350 to $12,000
- For married taxpayers filing jointly, the standard deduction rose from $12,700 to $24,000
Deductibility of Charitable Gifts
The cap on the deductibility of individual charitable gifts to public charities rose from 50 percent of adjusted gross income (AGI) to 60 percent of AGI.
No Income-Based Limits on Itemized Deductions
The “Pease Amendment,” which formerly limited taxpayers’ ability to apply itemized deductions after AGI exceeded certain income thresholds, was repealed.