The most recent tax reform bill represents one of the largest changes to the tax code in decades. Not-for-profit organizations are certainly not exempt from the changes and will be impacted by tax code reform. Read on for six of the most significant changes from the Tax Cuts and Jobs Act that may affect your not-for-profit organization.
1. Individual Taxation Changes
The changes affecting individual taxation could significantly impact your donors’ willingness to give. The tax benefits of making charitable contributions may be reduced for some donors. There are strategies available to counter the effects of these changes that your fundraising and development teams should be aware of. Crafting funding opportunities that utilize these strategies may help donors secure a tax benefit that would otherwise be lost. Please contact us if you would like to discuss this idea further and come up with a plan to keep your donors engaged.
2. Excise Tax on Compensation
Effective at the beginning of the 2018 tax year, not-for profit organizations must pay a 21% excise tax on any compensation in excess of $1 million paid to a “covered” employee. In this context, a “covered” employee refers to the top five most highly compensated employees in the current tax year or anyone who was a “covered” employee following the tax year December 31, 2016.
3. Changes to the Unrelated Business Income Tax (UBIT)
If an organization pays for certain fringe benefits for its employees, including parking passes and onsite athletic facilities, these expenses are now treated as unrelated business income to the organization. These payments are then subject to the unrelated business income tax (UBIT). However, the new tax laws also lowered the income tax rates, making UBIT less punitive than in previous years. See our article on UBIT for more detail on the other components of the unrelated business income tax.
4. Changes to UBIT – Redux
Previously, not-for-profit organizations which generated income through business activities unrelated to their exempt purpose would be subject to tax on that income. Therefore, if an organization carried out more than one unrelated business activity, the losses from one unrelated business activity could offset the income from another, reducing the amount of income subject to UBIT. Under the new tax laws, the income and losses from different activities are kept separate and losses from one activity can no longer reduce the amount of taxable income from another.
5. Contributions in Exchange for Seating at Athletic Events Nondeductible
In the past, a donor could make a contribution and, in exchange, receive priority access to seating at athletic events. In result the donor could treat 80% of the contribution as a tax-deductible charitable contribution. Under the new tax laws, these contributions are no longer tax-deductible to the donor. Nonprofit organizations should be aware of this change when calculating year-end contribution receipts for their donors.
6. Net Investment Income Tax on Educational Endowments
Educational institutions may be subject to an additional 1.4% tax on their net investment income. This applies to educational institutions that have met certain specific criteria. If you think this may apply to your organization, you should consult your tax advisor to help you better understand this additional tax and determine if it applies.
Summarized above are some the changes resulting from the new tax law. If you would like a more detailed explanation of any of these or other changes to the tax code and how they may affect your not-for-profit organization, please do not hesitate to contact your L&B professional at (858) 558-9200.