There is plenty of work to be done adjusting finances to make sure you are in the clear with the H.R. 1 tax revisions passed last December. No single article will provide a comprehensive guide on how to handle your taxes, but we can provide you with a starting place.
Additionally, you can find regularly updated information on the new tax laws and their interpretations online from the National Council of Nonprofits.
Note that the new tax laws are not yet completely understood. This information will be updated as the smaller details are uncovered and standard interpretations of these details are established.
Legislative Changes and Their Impact on Charitable Nonprofits
Currently, there are 12 changes that are either established to affect nonprofits or still up in the air on how they will be interpreted.
The Johnson Amendment was not removed from the books as was proposed, but it is weakened. This allows nonpartisan nonprofits to remain tax exempt. It affects faith-based organizations, charitable organizations and foundations. It is not yet known how this will play out as several bills still pending in Congress could further weaken or even repeal the Johnson Amendment.
The standard deduction for individuals is increased to $12,000, for married filing jointly to $24,000, and for heads of households to $18,000. The limit on cash donations for those who itemize deductions is increased to 60 percent of adjusted gross income. The Pease limitation on itemized deductions that limit deductions for upper-income individuals is repealed. The result of this is that the charitable deduction will be out of reach of more than 87 percent of taxpayers. The Joint Committee on Taxation estimates that itemized deductions will drop by $95 billion in 2018.
No provision to extend charitable giving incentives to non-itemizers was included in the bill. While a universal deduction was anticipated, none was made. This means that the negative consequences of doubling the standard deduction still exist.
Local and State Tax Deductions are more limited. Property taxes and state incomes taxes are limited to a total of $10,000 that can be deducted. This is likely to put more pressure on local and state governments, causing them to cut spending and eliminate programs serving people. This puts more pressure on foundations and charitable nonprofits to fill the gap.
Estate taxes remain, but the exemption has been doubled to roughly $11 million for individuals and $22 million for couples. This change is estimated to reduce federal revenue by nearly $100 billion over the next 10 years, and is expected to reduce charitable giving by $4 billion per year.
The individual mandate penalty for the Affordable Care Act has been removed starting in 2019. For those depending upon the ACA, 13 million of them are expected to lose medical coverage due to the resulting increase of premium costs. Those individuals losing healthcare coverage is expected to impact nonprofit healthcare organizations.
The changes affecting Unrelated business income tax (UBIT) require it to be calculated on each trade or business and not aggregate. The House plan lowers the corporate income tax rate from a range of 15 to 35 percent to a flat rate of 21 percent, allowing nonprofits with greater resources to pay a lower UBIT tax rate. The changes to UBIT may result in increased taxes on nonprofits; this takes money away from mission-related efforts.
Private college and university endowments are handled differently. The new tax changes include a 1.4 percent excise tax on the net investment income of private nonprofit colleges and universities with assets of at least $500,000 per full-time student and more than 500 full-time students. This is restricted to institutions that have over 50 percent of their students in the U.S.
A new 21 percent excise tax is imposed on nonprofits that pay compensation equal to or higher than $1 million to any of their covered employees. This change is proposed in order to bring nonprofit pay rules in line with the for-profit cap on compensation.
The unused provision in the tax code that allowed the IRS to create an optional tax return that nonprofits could file in lieu of providing donors with written acknowledgement of contributions has been repealed. This provision cleans up the measure that before required charities to collect and report sensitive personal information such as Social Security numbers to the IRS.
Simplifying What to Look For
To streamline the process, we have built a 2018 tax reform checklist that can help you target problem areas that should be addressed running through the current tax laws.
This checklist addresses seven primary points with contingent conditional questions that will guide you to areas you need to address for tax purposes. Those seven main points, including the contingent questions of the first section, include:
- Does your nonprofit:
- Have employees
- Have an employee expense reimbursement plan
- Pay employee medical insurance
- Have employee compensation over $1 million
- Pay employee on-site gym membership
- Pay employee parking
- Reimburse commuting costs
- Have a qualified pre-tax benefit plan
- Have a bicycle commuting plan
- Reimburse employee moving costs
- Reimburse employee business expenses
- Pay professional development or continuing education
- Reimburse employee home office expenses
- Pay performance achievement awards
- Does your nonprofit have policies that are now not accurate?
- Does your nonprofit receive funds from regularly-conducted business activities that are unrelated to its exempt purpose (UBI)?
- Are you a private university or college?
- Do you have tax exempt bonds or are you planning a capital project?
- Do you have large unfulfilled promises to give?
- Do you have a planned giving program for high net worth supporters?
Go down through the full document. Should you answer “yes” to any of the questions, you have work to do.
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