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Tax Reform: What’s the Impact on Nonprofits?

Now that The Tax Cuts and Jobs Act has been signed into law, virtually every individual and organization in America will be affected—including nonprofits.

To help you better understand the impact of the new law on your operations, we’ve summarized the key changes that will directly or indirectly affect nonprofit entities nationwide. We have also cited one significant item that didn’t make it to the bill’s final version (and generated some heated debate among legislators and the public).

Impact on Charitable Giving

Because the standard deductions have been nearly doubled (up to $24,000 for joint returns and $12,000 for individual returns), it’s estimated that 32 million people who previously did individual deductions will no longer follow this practice. This could drastically affect charitable giving, as these types of deductions usually comprise a large portion of such deductions.

Doubling the Estate Tax Threshold

The maximum amount of an estate exempt from the estate tax has been increased from $5.49 million to $10.98 million.

Increased Amounts Allowed for Cash Gifts

The limit for gifts to charitable organizations will increase to 60% (from its previous 50% level).

“Basketing” of Unrelated Business Taxable Income (UBTI) Organizations with more than one unrelated business or trade must now compute UBTI separately for each income channel, or “basket.” As a result, a loss from one activity can no longer offset income from another. 

Net Operating Loss (NOL) Carrybacks

NOLs from a prior year will be allowed to offset up to 80% of the organization’s income in the current year.  This applies only to such losses from UBIT activities, and not losses from general operations.

Excise Tax on Executive Compensation

Nonprofits will now be levied a 21% excise tax on compensation over $1 million paid to any of its five highest-paid employees during that tax year. This also includes “parachute payments” made to departing employees. Certain salary types are excluded from this tax (for example, a medical or veterinary professional performing services directly related to these areas of expertise).

Repeal of Advance Refunding Bonds

Advance refunding bonds are used to pay off other bonds, often at a lower rate than the previous bond. The new law makes taxable the interest on these advance refunding bonds. It also effectively eliminates this capability for bonds issued after Dec. 31, 2017.

There was also a change proposed in the initial drafts from the House and/or Senate that did not make it into the final Conference bill:

The Johnson Amendment

One of the most controversial proposed changes was the repeal of The Johnson Amendment, which would allow 501(c)(3) organizations, including colleges and universities, to endorse or oppose political candidates. This proposed change, however, was not included in the final bill and The Johnson Amendment remains in law.

The details of the Tax Cuts and Jobs Act can seem daunting given the many ways in which this new legislation can affect nonprofits. While we have pulled out the changes that are most likely to affect your organization, we strongly recommend that you contact your CPA firm to discuss your particular situation and how it affects your tax picture.