The Tax Cuts and Jobs Act (H.R. 1, “TCJA”) has been passed by Congress. Nonprofits are among the biggest losers under the new law. The main provisions of the TCJA affecting nonprofits are discussed below. Except where otherwise noted, all of these provisions take effect on January 1, 2018, so they will not affect 2017 taxes.
The TCJA retains the tax deduction for charitable contributions, which has been part of the tax code for almost 100 years. In fact, it enables taxpayers to contribute more and take a deduction. Under prior law, taxpayers could not deduct more than 50% of their adjusted gross income in charitable contributions. The TCJA increases this limit to 60%, which will help wealthy donors to give more each year.
However, taxpayers may deduct charitable contributions only if they itemize their personal deductions instead of taking the standard deduction. If you don’t itemize, you get no deduction. Currently, about 30% of all taxpayers itemize. As you might expect, the higher a taxpayer’s income the more likely it is that he or she will itemize. Itemizers are far more likely to donate to charity than nonitemizers. 83% of itemizers report giving to charity compared with only 44% of nonitemizers. Non-itemizers contribute less than 20% of total charitable giving.
A taxpayer should itemize only if his or her personal deductions—such as charitable contributions, mortgage interest, property tax, medical expenses—exceed the applicable standard deduction. For 2017, the standard deduction is $6,350 for singles and $12,700 for marrieds filing jointly. The TCJA roughly doubles these amounts to $12,000 for singles and $24,000 for marrieds filing jointly. As a result, the Urban-Brookings Tax Policy Center estimates that less than 5% of taxpayers will itemize.
Additionally, the TCJA reduces tax rates at most income levels, which lessens the tax benefit of making a charitable contribution by those who continue to itemize. For example, under the TCJA the top tax rate is 37%, instead of 39.6% under prior law. Thus, wealthy individuals who do itemize will save 2.9% less in tax by making contributions
A study by the Indiana University School of Philanthropy and Independent Sector concluded that changes such as these will reduce charitable giving by 1.7% to 4.6%. That’s an annual reduction between $4.9 and $13.1 billion. Others estimate the losses could amount to as much as $20 billion per year.
The TCJA also reduces the number of taxpayers subject to the federal estate. Under the new law, estates worth up $11 million per person ($22 million per married couple) are exempt from the federal estate tax starting in 2018, double the amount in 2017. One of the main reasons wealthy individuals make charitable bequests in their wills is to help avoid estate taxes. Charitable bequests are not subject to this tax. Total bequest giving in 2016 was estimated at $30.36 billion, which amounted to 8% of total charitable giving. Doubling the estate tax exemption will reduce such charitable bequests in 2018 and later. Estimates vary as to how much.
Subject to numerous exceptions and emptions, tax-exempt nonprofits that operate businesses unrelated to their charitable mission must pay an unrelated business income tax (UBIT) on their net unrelated business income. Under prior law, a nonprofit that operated multiple unrelated businesses could deduct the losses from one business from the profits from another to determine the amount of net unrelated business income subject to UBIT. The TCJA does not allow this. Starting in 2018, each unrelated business must determine its net income without regard to losses from other unrelated businesses. As a result, it’s likely that more nonprofits will have to pay UBIT.
The TCJA contains tax changes that adversely affect colleges and universities. Private colleges and universities with at least 500 students and endowments worth at least $500,000 per full-time student are subject to a 1.4% excise tax on their net investment income. Only colleges and universities with fairly large endowments are subject to this tax. For example, a college with 5,000 full-time students would have to pay the tax only if its endowment exceeded $2.5 billion.
In addition, donors will no longer be allowed to deduct as a charitable gift 80% of the cost of purchasing seat licenses to purchase tickets at college and university athletic events.
Nonprofit employers will also be required to pay a 21% excise tax on amounts paid to employees over $1 million. A similar requirement has been in place for many years for for-profit corporations. However, payments for medical services provided by doctors, nurses, and veterinarians are not subject to the tax.
A preliminary version of the TCJA sought to revise the “Johnson Amendment”—a 63-year-old tax law barring tax-exempt nonprofits, including churches, from endorsing candidates for office or making political contributions. The House version of the bill would have allowed ministers and other religious leaders to endorse candidates from the pulpit or other religious gatherings. However, this provision was dropped from the final bill after objections by Democratic senators. Thus, the Johnson Amendment remains unchanged.