The proposed tax legislation will certainly have a significant impact on individuals and business entities. Some of the changes may also have some unintended consequences for exempt organizations, primarily 501(c)(3) organizations. Below are some highlights that were covered at the Western Conference on Tax Exempt Organizations that both public charities and private foundations should keep an eye on.

Itemized Deductions for Individuals

  • Proposed Bill
    • The standard deduction will be increasing significantly for individuals. Standard deduction will increase to $24,400 for joint filers and $12,200 for individual filers.
    • Increased limitation of cash contributions to public charities from 50% Adjusted Gross Income (AGI) to 60% of AGI.
    • Increased exclusion from estate, gift, and generation-skipping taxes to $10 million.
    • Increased charitable mileage deduction for individuals.
  • Potential Impact
    • The increase in the standard deduction may lead individuals to reduce or eliminate their charitable giving amounts. Some economists estimate that less than 5% of all taxpayers will itemize. The increase in the AGI threshold may help mitigate some of the decrease in the overall charitable giving. The University of Lilly Family Schools of Philanthropy estimate a decrease in charitable giving of $13.1 billion in 2018.
    • The increase in the threshold for estate tax will potentially reduce charitable bequests by $3.6 billion to $6 billion per year.

Executive Compensation

  • Proposed Bill
    • Exempt organizations who are paying compensation over $1 million to individuals will be subject to a 20% excise tax on the organization for the excess compensation. This applies to an employee who is one of the five highest paid employees of the organization.
    • The 20% excise tax would apply to all amounts in excess of $1 million including cash and cash value of non-cash items, as well as parachute payments.
    • Intermediate Sanctions will be expanded to include Section 501(c)(5) and Section 501(c)(6) organizations.
  • Exempt organizations need to ensure they are establishing a rebuttable presumption of reasonableness for executive compensation. The rebuttable presumption process may be changed to become a minimum standard for organizations in determining compensation.
    • Compensation must be approved by an independent authorized body in advance
    • Authorized body must obtain and rely upon “appropriate data” for comparability
    • Authorized body must adequately document the basis for its determination concurrent

with the determination.

Private Foundations

  • Proposed Bill
    • Excise tax on net investment income will be simplified from a two tiered tax to a single rate of 1.4%.
  • Private foundations would no longer have the incentive to increase charitable distributions in order to have a lower excise tax rate.

Unrelated Business Income Tax

  • Proposed Bill
    • Exempt organizations with more than one unrelated trade or business must compute taxable income on a separate basis for each trade or business. A net operation loss deduction would only be allowed with respect to a trade or business from which the loss arose.
    • Corporate tax rate will be reduced to a 20% flat rate.
    • Licensing of an exempt organization’s name or logo which are normally categorized as royalty income would be subject to Unrelated Business Income Tax.
  • There are several exempt organizations that have different streams of Unrelated Business Income (UBI) and that use the losses from a certain activity to offset the profits from another. Exempt organizations who have not paid tax in the past will potentially have a tax liability. Organizations need to ensure they have analyzed their current expense allocations to ensure they are capturing all the expenses attributed to UBI.
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Lizbeth Nevarez

Lizbeth Nevarez, CPA, has more than 15 years of public accounting experience providing tax and consulting services and is GHJ’s Nonprofit Tax Practice Leader. She is also Secretary for GHJ Foundation, GHJ’s vehicle for purposeful and proactive giving to the community. Additionally, Lizbeth co-leads…Learn More