By: Lisa Heller, Tax Senior Manager
At this writing, the Tax Cuts and Jobs Act is all but signed into law. With this new tax bill comes sweeping changes that potentially impact all U.S. taxpayers, including exempt organizations. For the most part, these changes will be effective for tax years beginning after 2017.
The full text of the bill is here. The following provisions are of particular interest to exempt organizations:
- Decrease in Maximum Tax Rate – The bill decreases the tax rate for corporations, and on unrelated business taxable income (UBTI) for exempt organizations, from a maximum of 35% to 21%. Note that this new 21% rate is a flat tax rate. This decreased tax rate also applies to the proxy tax on exempt organizations for lobbying and political expenditures incurred.
- Unrelated Business Income – The bill requires exempt organizations carrying on more than one unrelated trade or business to calculate UBTI separately for each trade or business. This practice effectively prohibits using losses relating to one trade or business to offset income from another trade or business.
- Non-Deductible Fringe Benefits – The bill increases UBTI by the amount of certain fringe benefits for which deductions are disallowed. These fringe benefits include qualified mass transit and parking benefits paid by the employer. However, the provision for amounts paid by an employee through elective salary deferral via a qualified transportation fringe plan appears to be unchanged and would not be subject to tax.
- Executive Compensation – The bill imposes a 21% excise tax on compensation over $1 million for executives of nonprofit organizations. The excise tax is imposed on the organization and not on the employee.
- Net Operating Losses – The bill eliminates carrybacks of net operating losses (NOL), and it allows unused NOLs to be carried forward indefinitely. The bill also limits the NOL deduction to 80% of a taxpayer’s taxable income. These changes to the application of NOLs are effective for losses arising in tax years beginning after December 31, 2017.
- Local Lobbying Expenses – The bill eliminates the deduction for lobbying expenses regarding legislation before local government bodies, including Indian tribal governments. As a result, these expenses will be included in the calculation of non-deductible membership dues or proxy tax liability.
- Provisions Not Included – Certain provisions affecting nonprofits from earlier drafts of the tax bill will not be signed into law at this time. These provisions include the repeal of the Johnson Amendment, prohibiting Section 501(c)(3) organizations from engaging in political activity; the inclusion of name and logo royalties in UBTI; and changes to the methods for determining reasonable compensation for the purposes of the intermediate sanctions excise tax.
Many of these provisions require additional clarification and guidance, and still others may require technical correction. We will provide additional information in the coming weeks regarding how the new tax bill could affect your organization.
Please consult any member of the Tate & Tryon tax team if you have questions regarding this matter.