Tax Reform – What Nonprofits Need to Know

The Tax Cuts and Jobs Act (TCJA) has raised a lot of questions in the nonprofit community since it was passed by Congress in December 2017.

Here are four key reasons why nonprofit leaders should care about tax reform: the new law has an immediate impact on your employees, will require operational and policy changes, change your approach to fundraising, and increase your taxes or other costs.

Tax Reform will impact your employees

Some of the reforms will have an immediate impact on your employees and others will have a long term impact that may affect your future budget and employee policies.

Changes in Payroll Tax Withholding

On January 11 the IRS released updated withholding tables to reflect the changes in tax rates in the new law. The new withholding tables are in effect beginning Feb. 15th (some employers may have adopted sooner where feasible). New W-4’s are not required unless the employee wishes to change their status or number of exemptions.

Changes in the Taxation of Employee Benefits

Tax reform has made some changes to employee benefits that were previously non-taxable.

  • Transportation and parking benefits must now either be included as wage income for employees OR reported on Form 990-T as income so that the organization may pay tax on these benefits.
  • Reimbursed employee moving expenses are no longer excluded from wages, and
  • Bicycle commuting reimbursement is no longer excluded from wages.

Finally, the new law will repeal the individual mandate that your employee have health insurance in 2019 so some employees may opt out of coverage and impact your company’s health insurance costs.

Tax Reform will impact your Operations and policies

Tax reform may impact the way you do business going forward and increase your costs. You may need to modify your employee benefit policy, your accountable plan for expense reimbursement, and your chart of accounts to track the added costs. You may need to budget additional funds for professional help to understand the new law, increased medical insurance costs, increased accounting staff to track the changes, and it may be harder to attract new employees.

You should be proactive and plan now for next year when these reforms become effective. Be proactive with your staff so they know what is coming, review your employee policies, update your budget and start working on the needed policy changes.

Tax Reform will impact your Fundraising

Many articles have been written predicting taxpayers will stop taking charitable deductions under the new tax law and contributions will decrease.

There are two main changes to the tax law that experts are predicting will affect the level of charitable contributions made by individuals to non-profit organizations. The first is the change in the standard deduction. With the near doubling of the standard deduction, it is estimated that there will be 21 million fewer taxpayers itemizing their deductions in 2018 with the result that fewer individuals will have a tax-related incentive to make charitable contributions. The predicted dollar impact of this change is anywhere from $12.3 and $19.7 billion annually.

The second change that is expected to affect charitable giving is the increase in the estate tax exemption from approximately $5.49 million to $10.98 million. This increase in the exemption of income from estate tax is also expected to reduce charitable giving in the form of bequests. The Tax Policy Center estimates a reduction in charitable bequests of $4 billion annually.

The good news is most charitable giving is not done for tax planning purposes and these reductions are only a small fraction of annual charitable contributions. Some pundits predict that the “wealth effect” might actually increase charitable gifts. The wealth effect says that the tax cuts for corporations and the wealthy might motivate them to give more because they have a windfall of wealth.

Tax Reform will impact your Taxes

The new law may increase your taxes so you will need to pay more attention to estimated taxes to avoid a penalty and budget for more tax planning costs.

Unrelated Business Taxable Income will be computed separately for each trade or business activity

In previous years, all Unrelated Business Taxable Income (UBTI) activities were aggregated on Form 990-T allowing losses from one or more activities offset the income from other activities resulting in a lower taxable amount than if tax had been assessed on each activity. The AICPA sent a letter requesting more guidance on this and other changes on Jan 29, 2018 and we are still waiting to hear what will constitute a separate “trade or business activity” so stay tuned.

Unrelated Business Income Tax rate has changed

The rate at which Unrelated Taxable Business Income (UBTI) is taxed has changed to 21% for 2018. For years prior to 2018, the tax rates reflected the corporate rate and ranged from 15% to 35%. Organizations with a fiscal year ending in 2018 will use a blended rate.

Unrelated Business Taxable Income – NOL changes

Starting with 2018, Non-Profits filing Form 990-T will no longer be able to carryback (apply against the previous year’s income) their Net Operating Losses (NOLs). These NOLs will instead be carried forward indefinitely and will reduce up to 80% of taxable income for the year. In previous years, 100% of taxable income was allowed to be reduced using an NOL.

Final Thoughts

At over 500 pages in the new law, it is hard to know where to start but we recommend you have a meeting with your department heads, use a checklist of key changes, understand that timing is key, make operational and budget changes and be proactive about planning for the future. We created a free checklist and video to assist you in getting started and they can also be found on the Resource page of our website.