On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act into law. Within the legislation, there are a number of provisions that would specifically impact tax-exempt organizations, including institutions of higher education as well as current and former students and private foundations.
These are the tax reform provisions that could have the most significant impact on tax-exempt organizations.
- Income from discharge of certain student debt on account of death or total disability of the student would be excluded from taxable income for debt discharges occurring after December 31, 2017, and by December 31, 2025.
- Parents would be allowed to use up to $10,000 annually per student from a 529 college savings plan for K–12 education expenses.
- The 80% deduction by individuals for contributions made to colleges and universities for athletic event seating rights would be removed.
- A 1.4% excise tax would be enacted on the endowments of private colleges and universities with more than 500 students and an assets threshold of at least $500,000 per full-time student. The new law also added a slight modification: The definition of applicable educational institution was changed to include only institutions with more than 50% of tuition-paying students located in the United States.
Unrelated Business Income Tax
- The current maximum corporate rate would be permanently reduced to 21% from 35%.
- Net operating losses (NOLs) would be allowed to be deductible only up to 80% of taxable income while eliminating any carryback opportunity and allowing for indefinite carryforward, applicable for tax years beginning after December 31, 2017.
- The law also repeals the corporate alternative minimum tax (AMT) and allows the AMT credit to offset regular tax liability for any taxable year. The AMT credit would be refundable in tax years beginning after 2017 and before 2022, subject to certain provisions.
- Organizations that provide employees with transportation fringe benefits, on-premise gyms, and other athletic facilities would be required to treat those costs as unrelated business taxable income (UBTI)—excluding addback of amounts paid that are directly connected with UBTI.
- The law also requires organizations that carry on more than one unrelated business activity to separately calculate UBTI for each activity. This would effectively prohibit using deductions relating to one business activity to offset the taxable income of another business activity. The law further provides relief by providing a special transition rule allowing NOL’s arising in years before January 1, 2018, and being carried forward to not be subject to the rule of this provision.
- The law enacts a tax equal to the corporate rate of 21% on compensation in excess of $1 million paid to any of a tax-exempt organization’s five highest paid employees in a tax year. The law further clarifies substantial risk of forfeiture for purposes of this provision and excludes remuneration paid to a licensed medical professional when services are directly related to the performance of medical or veterinary services.
- Inclusion in taxable income would be required of certain fringe benefits, such as moving expense reimbursements and tax preparation services. Qualified bicycle commuting expenses and suspension of these benefits for tax years beginning before January 1, 2026, was added as part of the conference agreement.
Key Provision Omissions
These are the most important provisions that were omitted from the final tax bill.
- Increased aid offered under the American Opportunity Tax Credit.
- Elimination of the Hope Scholarship Credit and Lifetime Learning Credit.
- Repeal of certain workplace benefits for institutions of higher education thus retaining the exclusion from income for qualified tuition reductions.
- The employer-provided housing exclusion would’ve been modified in the House bill, limiting it to $50,000 for those married filing jointly with a phaseout for highly compensated employees—those paid $120,000 or more. The Senate bill was silent on this benefit. The new law doesn’t include the House bill provision, retaining the exclusion from income for employer-provided housing.
- Repeal of the deduction for student loan interest available to taxpayers with a modified gross income of less than $65,000 or $135,000 for married couples filing jointly.
- The current two-tiered, excise tax-rate structure wasn’t repealed. A flat rate of 1.4% on net investment income had been proposed.
- The requirement that private operating foundations with museums be open at least 1,000 hours per year to be exempt from the 30% excise tax on certain undistributed earnings.
- An exception for private foundations that would exempt them from the excess business holdings tax for certain independently operated business holdings.
- Permitting an organization to make statements relating to political campaigns in the ordinary course of their activities.
- Requiring additional reporting for donor-advised fund (DAF) sponsoring organizations on their inactive DAF policies and the average amount of grants made from their DAFs.
- The Work Opportunity Tax Credit (WOTC) wasn’t repealed.
- The conference agreement retains tax-exempt status for private activity bonds but does repeal the exclusion from gross income on a bond issued to advance refund another bond. Authority to issue tax-credit bonds and direct-pay bonds is repealed prospectively, applying to bonds issued after December 31, 2017.
We’re Here to Help
For more information on how the new tax law could affect your tax-exempt organization, contact your Moss Adams professional.