On December 2, members of the Senate joined their House counterparts in passing a new tax plan. As a result, the competing tax plans went into a reconciliation process with a tentative agreement on a reconciled tax plan announced on December 13, which increased the likelihood that the new tax plan will be signed into law by the President before the end of the year. The expected tax framework will affect almost every taxpayer (individuals and businesses), and its provisions have the potential to have longstanding impacts on the nonprofit sector.
We do not yet have details of the reconciliation between the two plans. However, upon initial review of the competing plans, below are some elements thought to have the largest potential impact on the nonprofit sector:
Standard Deduction and Incentives for Charitable Giving
Both the House and Senate versions of the law would roughly double the standard deduction for taxpayers, resulting in an expected reduction of the number of taxpayers who itemize their deductions from 30% of taxpayers to roughly 5%. In addition, both versions of the law would raise the limit on cash donations for those who still itemize and would repeal the “Pease limitation” on itemized deductions that currently limits deductions for upper-income individuals. As a result of this change in law, the charitable deduction would be out of reach for 95% of taxpayers, potentially reducing the incentive for charitable giving. The nonpartisan Joint Committee on Taxation (“JCT”) estimates that giving to charitable nonprofits could fall by more than $13 billion each year due to this change. While the loosening of the charitable deduction limitations and repeal of the “Pease limitation” would be helpful, that would only affect the 5% of taxpayers who still itemize. Congress considered compensating for this by offering additional universal deductions for charitable contributions, but neither the House nor Senate included this in its final bill.
State and Local Tax (SALT) Deductions
Both the Senate and House versions of the law repeal the deductibility of state and local income taxes and would cap property tax deductions at $10,000. The possible impact on charitable nonprofits is that it would likely increase pressure on state and local governments to enact tax and spending cuts, leading to elimination of programs serving people in need and increasing the burdens on charitable nonprofits and foundations to fill the gaps.
Both the Senate and House versions of the tax bill would essentially double the exemptions on the estate tax to about $11 million for individuals and $22 million for couples. The JCT estimates this will cost the Treasury an estimated $94-$151 billion dollars over 10 years. The estate tax is an important source of revenue for the work of charitable nonprofits, as it encourages donors to address future needs in their communities through estate planning. Raising the estate tax exemptions disincentivises this sort of planned giving.
Private Foundation Excise Tax
The House version of the tax bill would establish a streamlined private foundation excise tax of 1.4% on net investment income that is between the current rates of 2% and 1%. The Senate version makes no changes to current law. The JCT estimates that the House’s plans will raise about $500 million in revenue over a decade, which means that it is a tax increase on private foundations that will result in fewer or smaller grants to charitable organizations.
Nonprofit College and University Endowments
Both the Senate and House versions would create a new 1.4% excise tax on net investment income of nonprofit colleges and universities. The threshold impacted varies by bill, as the House calls for taxes on assets of greater than $250,000 per full-time student (minimum 500 students) and the Senate version calls for taxes on assets of greater than $500,000 per full-time student (minimum 500 students). The impact of this will result in fewer earnings on endowments being available to support the mission of the university or college. It could also dissuade future endowment giving, as a donors may be wary that the earnings on their gifts will be going to the Treasury as opposed to supporting the mission of the organization.
The House and Senate versions of the law would subject tax-exempt organizations to an excise tax on compensation in excess of $1 million paid to any of their five highest-paid employees during the tax year. The excise tax would apply to all compensation paid to a covered person for services, including cash and the cash value of all compensation (including benefits) paid in a medium other than cash. Payments to a tax-qualified retirement plan and amounts that are excludable from the executive’s gross income would be excluded from the excise tax. The Senate version of the bill would expand and modify the excise tax on excess benefit transactions (i.e. coaches and investment advisers become disqualified persons).
There are other changes proposed related to The Johnson Amendment, private activity bonds, unrelated business income, donor-advised funds, and volunteer mileage rates.
While we wait on the final details of the reconciled plan, we encourage all stakeholders in the nonprofit sector to educate themselves on the proposed changes and prepare for the future.
If you have any questions about these matters and how your interactions with the nonprofit sector could be affected, please contact Michael Barloewen at email@example.com, Donita Joseph at firstname.lastname@example.org, or call toll free at 844.4WINDES.