On December 2, 2017, the US Senate passed its version of the Tax Cuts and Jobs Act. The US House of Representatives passed its own version of the tax bill November 16, and a conference committee of representatives from both houses of Congress started working on a reconciled final bill December 4.
Each of the comprehensive tax reform bills would greatly modify the federal tax code if enacted. Within the legislation, there are a number of proposed changes that would specifically impact tax-exempt organizations, including provisions affecting institutions of higher education as well as current and former students and private foundations.
Where the Bills Agree
Higher Education
- Income from discharge of certain student debt on account of death or total disability of the student would be excluded from taxable income.
- The Coverdell Education Savings Account would be eliminated, but parents would be allowed to use up to $10,000 annually 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, but the bills differ on the assets threshold: at least $250,000 per full-time student in the House Bill and $500,000 per full-time student in the Senate Bill.
Unrelated Business Income Tax
- The current maximum corporate rate would be permanently reduced to 20% from 35%.
- Net operating losses (NOLs) would be allowed to be deductible only up to 90% of taxable income while eliminating any carryback opportunity and allowing for indefinite carryforward. However, the Senate bill would further reduce the rate to 80% in tax years beginning after December 31, 2022.
Other Provisions
- A 20% excise tax would be enacted on compensation in excess of $1 million paid to any of a tax-exempt organization’s five highest paid employees in a tax year.
- Inclusion in taxable income would be required of certain fringe benefits, such as moving expense reimbursements and tax preparation services. The Senate bill also would include qualified bicycle commuting expenses.
Where the Bills Diverge
Higher Education
- Aid offered under the American Opportunity Tax Credit would be increased under the House bill, but the Senate bill only addresses extending relief to graduate students.
- The House bill would eliminate the Hope Scholarship Credit and Lifetime Learning Credit. The Senate bill wouldn’t.
- Certain workplace benefits for institutions of higher education, including tuition reimbursements, would be repealed in the House bill. The Senate bill only states that it will preserve education relief for graduate students.
- The employer-provided housing exclusion would be modified in the House bill, limiting it to $50,000 for those married filing jointly, with a phase out for highly compensated employees—those paid $120,000 or more. The Senate bill is silent on this benefit.
- The House bill would repeal a 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 Senate bill doesn’t address this either.
Private Foundations
- The current two-tiered, excise tax-rate structure would be repealed in the House bill by streamlining the excise tax rate on net investment income to a 1.4% flat rate. The Senate bill doesn’t address the excise tax-rate structure.
- The House bill would require private operating foundations with museums to be open at least 1,000 hours per year to be exempt from the 30% excise tax on certain undistributed earnings. This issue isn’t addressed in the Senate bill.
- Private foundations would be exempt from the excess business holdings tax for certain independently operated business holdings in the House bill. The Senate bill struck this provision on December 1, 2017.
Unrelated Business Income Tax
- The reduced corporate tax rate would begin in 2018 in the House Bill. The Senate bill delays the reduction until 2019.
- The House bill repeals the corporate alternative minimum tax (AMT). It’s retained in the Senate bill.
- The House bill would require organizations that provide employees with transportation fringe benefits, on-premise gyms, and other athletic facilities to treat those costs as UBTI. The Senate bill doesn’t address treating these costs as UBTI.
- The Senate bill would also require 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 House bill doesn’t require this.
Other Provisions
- Tax-exempt organizations would be permitted to make statements relating to political campaigns in the ordinary course of their activities in the House bill, provided the statements are of minor consequence. The issue isn’t addressed in the Senate bill.
- The House bill would also require additional reporting for donor-advised fund (DAF) sponsoring organizations on their inactive DAF policies and the average amount of grants made from their DAFs while. The Senate bill doesn’t address this.
- The Work Opportunity Tax Credit would be repealed in the House bill. The Senate bill doesn’t mention the credit.
- The tax-exempt status for private activity bonds and advance refunding bonds is proposed to be repealed in the House bill. It also proposes to repeal advance refunding bonds altogether. The Senate bill only proposes repeal of the exclusion of interest from gross income on a bond issued to advance refund another bond.
We’re Here to Help
For more information on how the House or Senate’s proposed tax plans could affect your tax-exempt organization, contact your Moss Adams professional.