As you know by now, Congress approved the Tax Cuts and Jobs Act (TCJA) in December 2017. Although most of the changes will directly affect individuals and for-profit businesses, tax-exempt organizations need to understand how some of the changes may affect their organization and operations.
- Unrelated business income tax (UBIT) and how it is computed was modified to require UBIT activity to be computed separately. A net operating loss in one unrelated business activity will not be allowed to offset income by another unrelated business activity.
- An indirect impact to tax-exempt organizations will relate to the significant increase in the standard deduction. The standard deduction increase will allow many more individuals to take the standard deduction rather than itemizing their deductions on Schedule A.
- Roughly, individuals that itemize give 82% of charitable giving and, therefore, it will have an impact.
- Based on preliminary estimates it is expected to be significant with estimates of a decrease of about 5-10% in contributions.
- Tax-exempt organizations that rely on charitable giving must discuss this with their Board of Directors and plan a course of action on how they can lessen the decrease if possible.
- The TCJA did increase the charitable contribution limit for individuals to 60% of the individual’s adjusted gross income; however, this increase is not expected to lessen the issue previously discussed with overall charitable giving. In order to benefit those who are charitably minded, many advisors are recommending to individuals that grouping charitable giving across years may allow for better tax results. Doing so through direct giving or donor advised funds might change the landscape of giving by many individuals.
- The TCJA also eliminates the deductions for entertainment expenses for sporting events, golf outings, etc. This will have an impact to the participant/donor on the deductibility of nonprofit organizations’ entertainment fundraisers.
- Gift and estate tax exemptions almost doubled in the TCJA and given that estates will have a much larger exemption the expectation is estates will bequest less dollars to tax-exempt organizations.
- Lastly, the TCJA essentially eliminates advance refunding for municipal bonds issued after 2017 by making interest on advance refunding bonds taxable. Interest on current refunding bonds would remain tax-exempt.
Above are only a few of the changes that are a result of the TCJA of 2017. The TCJA brings many challenges to tax-exempt organizations and organizations must be proactive in identifying the changes and understanding the impact to their organization.
As your partner and business advisor, HW&Co. will assist you in better understanding these challenges and the impact they will have on your Organization and its operations while assisting you to position your Organization for the future.
Jordan Keller, CPA