The Tax Cuts and Jobs Act has several provisions that may affect your not-for-profit organization. Major changes regarding UBIT, excise taxes and the impact on donor community are listed below:
Unrelated Business Income Tax (UBIT)
- The decrease in the maximum corporate income tax rate from 35% to 21% also decreases the UBIT rate.
- Losses in one UBI activity are now separated and can no longer be used to offset income earned by another UBI activity.
- Use of Net Operating Loss generated after 2017 is limited to 80% of taxable income in any year.
- The cost of certain fringe benefits is now included in the computation of UBIT, including qualified transportation fringe benefits, a parking facility used in connection with qualified parking, and any on-premises athletic facility.
- Endowment tax of 1.4% on net investment income of private colleges and universities if endowments exceed $500,000 per student, minimum of 500 students, and 50% of students are located in U.S. (effectively endowments exceeding $250M).
- High compensation tax of 21% assessed to an employer who pays compensation in excess of $1M to a covered employee (one of the five highest compensated employees for the year).
- Once a person is counted as a covered employee, he/she must either quit, retire, or be paid less than $1M to drop off the list – so an organization may have more than five persons to pay excise tax on in any one year.
- The tax does not apply to compensation paid to licensed medical professionals for the performance of medical or veterinary services.
Repeal of Advance Refunding Bonds
- Interest on advance refunding bonds (which are bonds issued more than 90 days before the redemption of the refunded bonds) is no longer tax-exempt; effective for advance refunding bonds issued after 2017.
- Interest on current refunding bonds continues to be tax-exempt.
Impact on Donor Community
- For C-corporation donors, the after-tax cost of a donation has increased as a result of the decrease in the corporate tax rate.
- For individual donors, although the limit on the deductibility of cash contributions has increased from 50% to 60% of Adjusted Gross Income, it is likely that the after-tax cost of a donation has increased due to: lower individual tax rates, limit on certain itemized deductions (cap on state and local taxes of $10,000 and elimination of miscellaneous itemized deductions), and the increase in the standard deduction.
- The combination of the limitations on various deductions and the increase in the standard deduction will result in fewer taxpayers that will itemize and therefore will no longer receive a tax benefit from their charitable contributions.
- Donors may consider “bunching” their contributions (and other deductions such as prepaying real estate taxes, state income taxes, and medical expenses) into the same year and/or consider funding a donor-advised fund to maximize tax benefits.
- For both business and individual donors, there is some hope that some of the increase in their after-tax income (as a result of lower income tax rates) will be steered toward charity but there is no way to know if this will happen.
- Bequests may decrease as a result of the increase in the (federal) estate tax exemption.