On Friday, December 15, 2017, a congressional conference committee reconciled major differences in the House and Senate versions of the Tax Cuts and Jobs Act (the Act) and released a joint conference report. The House and Senate are scheduled to vote on the final version of the legislation this week.
For those who have been following the Act closely, below is a list of the provisions that survived the committee and that have been incorporated into the final legislation. For those seeking more background, Quarles & Brady compared the House and Senate versions of the Act in previous updates (click here for a comparison of the final versions of each bill and here for a comparison as they existed on November 16) and analyzed the original House version in earlier updates (click here for a general summary of the Bill and here for the Bill’s impact on tax-exempt organizations).
Most provisions of the Act would be effective for tax years beginning after December 31, 2017.
The final version of the Act:
- Increases the deduction limitation for charitable contributions of cash to public charities (and a limited group of private foundations) from 50% to 60% of a taxpayer’s adjusted gross income.
- Increases a tax-exempt organization’s unrelated business taxable income by the amount of certain fringe benefit expenses for which a deduction is disallowed.
- Requires that unrelated business taxable income be computed separately with respect to each trade or business and without regard to the specific deduction generally allowed under Section 512(b)(12).
- In addition to any penalty that might be imposed under Section 4941 (self-dealing for private foundations) or Section 4958 (excess benefit transactions for public charities and social welfare organizations), imposes a 21% excise tax on compensation in excess of $1 million paid to each of certain employees by a tax-exempt organization, including compensation paid by related organizations.
- Imposes a tax on certain private colleges and universities equal to 1.4% of the net investment income of the institution for the taxable year. Net investment income for these purposes includes amounts earned by related organizations.
- Repeals the exclusion from gross income for interest on a bond issued to advance refund another bond.
Several noteworthy provisions were omitted from the final legislation, specifically provisions that would have:
- Reduced the Section 4940 excise tax on private foundation net investment income from 2% to 1.4% and eliminated the 1% alternative rate.
- Created an exception from the Section 4943 excess business holdings tax on private foundations for independently operated, philanthropic business holdings (i.e., “Newman’s Own” exception).
- Excluded an organization operating an art museum from the definition of a private operating foundation, unless the museum was open to the public at least 1,000 hours per year.
- Permitted an organization described in Section 501(c)(3) to make statements relating to political campaigns during the ordinary course of its regular and customary activities without jeopardizing the organization’s tax-exempt status, so long as it incurred not more than de minimis incremental expenses (i.e., the proposed repeal of the Johnson Amendment).
- Imposed additional reporting obligations for sponsoring organizations of donor advised funds.
- Subjected a governmental organization described in Section 115 of the Code to unrelated business income tax if the organization also was described in Section 501(a).
- Repealed tax-exempt status for qualified private activity bonds and terminated the qualified classifications.
Quarles & Brady Comment. The final version of the Act removes many of the more punitive and controversial provisions that were included in earlier versions of the legislation. The fact that the repeal of the Johnson Amendment is not part of the Act is likely to be a significant relief to much of the philanthropic sector, as many of its members feared the divisive challenges that surely would have followed its repeal. The preservation of the tax-exemption for private activity bonds, including bonds issued by 501(c)(3) organizations, also is an important “win” for the philanthropic sector and the broader communities it supports. Other omissions are not as welcome. For example, the fact that the simplification of the private foundation excise tax is not included in the final version is inexplicable given its bipartisan support and support from the foundation community.
The provisions that remain are significant, and many raise important questions. For example, and as noted in our prior update, what will be considered separate trades or businesses for determining unrelated business taxable income (e.g., each investment—which would be a nightmare—or an organization’s investments collectively)? In addition, there are several other interpretation issues in that provision. For another, the tax on certain compensation in excess of $1 million raises as many questions as it answers. The tax on investment earnings of colleges and universities with large endowments begs for a policy rationale, as there is no direction of the tax generated toward benefiting students or even toward education.
In addition, more general provisions of the Act, such as lower tax rates, doubling of the standard deduction, and doubling of the exemption from the estate tax, are expected to have a major negative impact on charitable giving.