The 2017 Tax Cuts and Jobs Act (the TCJA) will have a significant impact on individuals, for-profit businesses, and nonprofits. In the first few months of 2018, we’ve sent out numerous articles about how the TCJA affects nonprofits. Here is a summary of those articles, along with additional points of interest.
Potential Unrelated Business Taxable Income (“UBTI”) On Certain Employee Benefits
We believe this change will have the most significant effect on nonprofits. Under the new law, certain benefits previously provided tax-free to employees will now become taxable. Those benefits include:
- Expenses paid by a nonprofit organization that would be considered qualified transportation fringe benefits (such as bus passes, van pools, parking passes/reimbursements, and bicycle commuting reimbursements).
- Expenses associated with any parking facility used to provide employee parking.
- Expenses associated with an on-premises athletic facility.
Under the old rules, nonprofits could provide these benefits to employees tax-free. Starting on January 1, 2018, nonprofit employers that want to continue providing these benefits will need to do one of two things:
- Include these benefits as taxable income to employees (the value would be included as income to the employee on the employee’s Form W-2), or
- Elect to pay tax on these benefits by filing a Form 990-T. Remember that when filing a Form 990-T, the nonprofit is allowed a standard deduction of $1,000 (so if these benefits are less than $1,000 in total for the year, no tax would be due). Any amount above $1,000 will be taxed at 21%.
If the nonprofit expects to file the Form 990-T (and pay the related tax), it should consider making estimated tax payments during the taxable year to minimize underpayment penalties. For 2018 calendar year entities, the due dates for estimated payments are April 17, June 15, September 17, and December 17. Quarterly payment dates will vary for those nonprofits without calendar year ends. We can help determine if estimated payments are going to be required and when they would be due for your organization.
Potential Drop in Contributions
Most donors don’t give to nonprofits with the goal of receiving tax deductions, but there could be a drop off in charitable contributions due to the TCJA. In 2017, the standard deduction for married couples filing jointly was $12,700. In order to take advantage of itemizing deductions, a married couple would need their expenses in excess of $12,700. So once a married couple has expenses beyond the $12,700 limit, then they will be able to itemize and receive a greater deduction for the extra expenses (including charitable contributions). Under the TCJA, the 2018 standard deduction is increased to $24,000 for married couples, so there will be situations where these taxpayers will no longer be able to deduct charitable contributions that would have otherwise been deducted in 2017. As a result, there’s a chance that contributions could decline. Note that the standard deduction for single taxpayers was $6,350 in 2017, but increases to $12,000 in 2018.
Again, we don’t believe most individuals that contribute to nonprofits do so for tax advantages, but this tax law change might result in a reduction in charitable contributions. Experts estimate this could result in an overall decrease in contributions of four or five percent.
Section 529 Accounts Can Be Used to Fund Private School Costs
Section 529 Accounts are used by many families to help pay for college tuition and certain other college-related expenses. With 529 Accounts, funding can be set aside today, earn investment income over time, then be used to pay for college later. The benefit to the taxpayer is that the investment income earned on the account is never taxed.
Under the TCJA, 529 Accounts can now be used to pay for tuition and certain other expenses for elementary and secondary schools (up to $10,000 per student, per year). But approach with caution. These accounts are not administered at the federal level, but at the state level, and each state can modify its own rules on how these accounts can work. And unlike college, private school costs require payment on a much shorter time horizon. Still, this tax planning opportunity should at least be considered.
Other Provisions That Could Affect Your Organization
There are various other changes that could affect nonprofits under the TCJA:
- Certain private colleges and universities are going to be subject to a 1.4% excise tax on net investment income.
- There is a 21% excise tax on annual compensation of $1,000,000 or more paid to any of the organization’s top five highest paid employees.
- Charitable deductions paid to colleges associated with preferential seating at athletic events has been eliminated.
- Nonprofits with multiple unrelated business activities are no longer allowed to offset income from profitable business activities with losses from unprofitable activities. Each activity is viewed separately. Unused losses can be carried forward to future years. This is effective to tax years beginning after December 31, 2017.
The remaining provisions are effective for amounts paid of incurred starting January 1, 2018.