NYC Comptroller Weighs in on Tax Reform’s Impact on NYC Non-profits
By Eric Owens, Tax Senior
Last month, New York City Comptroller Scott Stringer released a report regarding how the new federal tax law, known as the Tax Cuts and Jobs Act (“TCJA”), may impact New York City’s non-profit sector. The report focuses on three areas of impact, including reduced tax incentives for charitable giving, higher taxes on unrelated business income, and the new excise tax on university endowments.
TCJA Reduces Tax Incentives for Charitable Giving in 3 Ways
#1. The standard deduction was doubled for individual taxpayers. As a result, fewer filers will choose to itemize their deductions, and therefore will no longer be able to deduct their charitable contributions made. Based on the report’s analysis, the number of NYC filers who itemize deductions is expected to drop from greater than 30% in 2017 to less than 15% under the TCJA. This in effect will diminish the tax savings incentives of making charitable contributions for these taxpayers.
#2. The estate tax exemption was increased from $5.4 million to $11.2 million. Many high net-worth individuals plan bequests to charitable organizations as part of their overall estate planning. By increasing the estate tax exemption, the incentive to donate to non-profits as a method of estate planning is decreased accordingly.
#3. The new decreased limitation on deductible state and local taxes, to a limit of $10,000, will increase the overall federal tax liabilities for many higher income taxpayers. Higher tax bills may in turn reduce charitable giving. According to the report’s analysis, roughly 50% of NYC filers with incomes over $250,000 will face higher tax bills for 2018.
TCJA Imposes Higher Taxes on Unrelated Business Income
The new “siloing” provision under TCJA disallows losses from one unrelated trade or business activity to offset gains from other unrelated trade or business activities. As a result, overall taxable income is likely to increase for many non-profits. In addition, the new flat federal tax rate on unrelated business income of 21% is higher than the previous federal tax rate, which is graduated based on overall taxable income, for non-profits with lower amounts of taxable income. The report estimates that this provision could impose an effective tax rate increase of as much as 40% on smaller non-profits with unrelated business income up to $50,000.
TCJA Imposes New Excise Tax on University Endowments
Additionally, the TCJA imposes an annual 1.4% excise tax on the net investment income of private university endowments valued at $500,000 or more per full-time student and with at least 500 tuition-paying students. This provision is estimated to impact approximately 35 institutions in 2018, including at least three located in NYC. The number of affected institutions is expected to increase over time, as endowments grow.
Legislative Proposals Supporting New York Nonprofits
Comptroller Stringer’s report also provided several legislative proposals to serve as a way to support non-profit organizations in New York State and NYC:
- Allow filers to claim deductions for charitable contributions even if they don’t itemize.
- Expand the charitable deduction threshold for high-income filers from its current level of 50%. Under current law, high-income filers in New York State are subject to a 50% of AGI limitation on charitable deductions.
- Decouple from the TCJA unrelated business income provision for “siloing.” According to the Comptroller, by reverting to the law that existed prior to the enactment of the TJCA, non-profits can offset gains from some unrelated business activities with losses from others, maintaining taxes at lower levels.
- Allow universities to deduct the endowment excise tax from any NYS unrelated business income. The report claims this additional deduction would help reduce the impact of the endowment tax and would allow universities to continue to provide scholarships and services to their students.