Tax Reform Provisions Which Could Impact Your Not-For-Profit Organization

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On December 22, 2017, President Trump signed into law what is known as the Tax Cuts and Jobs Act. The bill included substantial changes to the way U.S. taxpayers will determine taxable income and calculate income tax. The bill also included the following provisions, which should be reviewed by not-for-profit organizations to determine the potential impact on operations and cash flow:

Joel C. Jones, CPA/ABV, CVA, CIA , CFF, CGMA Director, Kassouf & Co.

  • Increase in standard deduction for individual taxpayers. In order for an individual to receive a deduction for charitable donations, the individual must itemize those deductions. The Tax Act increased the standard deduction to $12,000 for single and married filing separately and $24,000 for joint or surviving spouse filers. Therefore, many taxpayers who itemized in the past will no longer itemize after 2017, resulting in no Federal income tax benefit from charitable giving.
  • Excise tax related to payments of excess compensation. The Tax Act includes a provision which assesses a 20% excise tax on organizations making certain wage payments to “covered employees” in amounts that exceed $1 million, including certain “excess parachute payments.”
  • Excise tax related to investment income of certain private colleges and universities. The Tax Act provides for the assessment of a 1.4% excise tax related to the “net investment income” of private colleges and universities of a certain size, holding investment assets with values exceeding $500,000 per student of the institution.
  • Changes in calculations of unrelated business taxable income (UBTI). Under pre-Tax Act provisions, not-for-profit organizations with multiple sources of UBTI were permitted to calculate one combined UBTI. The new Tax Act now requires organizations to compute each UBTI separately for each unrelated business activity, then combine the UBTI. Any UBTI loss for an activity is excluded. The result of this treatment means unrelated business activity losses can no longer offset a profitable unrelated business activity.
  • Changes in treatment of certain entertainment expenses and transportation fringe benefits. The Tax Act requires organizations to include in UBTI certain entertainment expenses, transportation fringe benefits, and “on premises athletic facilities,” unless these expenses were directly connected to an unrelated trade or business.

Given the potential impact of these new tax provisions, most not-for-profit organizations should consider the following:

  • Assess the impact of a potential reduction in revenue related to the increase in standard deduction for individual taxpayers. Consider communicating with current donors and reinforcing the organization’s charitable mission.
  • Review your organization’s current compensation structure to assess any potential impact of the excise tax related to compensation as well as any deferred compensation arrangements.
  • Review sources of unrelated business income and how these sources are combined for income tax reporting, including partnership investments, as these may generate UBTI.
  • Review current entertainment and fringe benefit policies and expenditures to determine if these items will create UBTI.

If you have questions about how these provisions could affect your organization, please contact Kassouf & Co.

Joel C. Jones, CPA/ABV, CVA, CIA, CFF, GGMA Director, Kassouf & Co.

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