Last night, the Senate voted 51-48 to pass comprehensive tax reform legislation, as amended to comply with reconciliation rules. Today, the House voted 224-201 to pass the amended legislation. The bill will go to President Trump, who is expected to sign the legislation into law. The legislation has many provisions that will impact tax-exempt organizations (summarized here). Provisions directly affecting exempt organizations are projected to raise over $9 billion in federal revenues, and many other provisions will have an indirect impact.
Impact on Charitable Contribution Incentives
The legislation leaves the charitable contribution deduction in place as an itemized deduction, and no “universal” or “above-the-line” deduction is adopted. As a result of the changes to the standard deduction, other itemized deductions, marginal tax rates, and the estate tax, all of which are generally effective from 2018 through 2025, the legislation is expected to reduce the number of taxpayers taking itemized deductions, which will effectively limit the benefit of the current charitable contribution deduction, and weaken the tax incentive to make charitable contributions at death. However, incentives for individuals to give during the remainder of 2017 may now be greater, because many are anticipating that in 2018 they will use the standard deduction, their marginal tax rate will be lower, or both.
Unrelated Business Income Tax (UBIT) Changes
The legislation makes two significant changes to UBIT. First, beginning January 1, 2018, certain fringe benefits provided by tax-exempt employers, including qualified transportation and parking benefits, will be subject to UBIT at the new 21% corporate rate in certain circumstances. The expanded UBIT could also apply to the expenses of on-premises athletic facilities, although an exception appears to be available for facilities that are available to employees generally and not just to officers or highly compensated employees. The legislation calls for the Treasury Department to issue regulations or other guidance providing for “the appropriate allocation of depreciation and other costs” with respect to parking facilities and on-premises athletic facilities.
Second, for tax years beginning in 2018, UBIT must be computed separately with respect to each separate line of business, so losses from one business generally cannot offset income from another.
Excise Tax on EO Employee Compensation
Effective January 1, 2018, a 21% excise tax will be imposed on tax-exempt employers paying certain compensation to “covered employees.” Covered employees generally include the five highest compensated employees of the organization for the current taxable year or for any prior taxable year beginning after December 31, 2016. The excise tax generally applies to a covered employee’s W-2 wages (other than Roth contributions) in excess of $1 million, as well as to certain payments contingent on the covered employee’s separation from employment that exceed three times their average compensation for the prior five years (known as “excess parachute payments”). Compensation received from both the employer and certain related persons generally is aggregated in determining the tax. However, for purposes of the excise tax, compensation does not include certain payments to licensed medical professionals for medical services or excess parachute payments to employees who fall below a specified compensation threshold ($120,000 in 2018).
Political Campaign Activities of Charities
The legislation does not include a provision (from the original House version of the bill) that would have partially repealed the longstanding prohibition on charities intervening in political campaigns (also known as the Johnson amendment), which failed procedural hurdles in the Senate.