Republican Tax Reform Proposal Would Impact Exempt Organizations

House Republicans unveiled their tax reform proposal, titled the Tax Cuts and Jobs Act of 2018 on Thursday. The act includes provisions that tax-exempt organizations should be aware of.

Perhaps most striking is a provision that would impose a 20% excise tax on compensation paid to employees of tax-exempt organizations in excess of $1 million. This provision is reminiscent of the disallowance of deduction for corporate taxpayers for compensation in excess of $1 million under Section 162(m). Unlike the corporate disallowance, however, the excise tax features no exception for performance-based compensation. The excise tax, which is levied on the employer and not on the employee, normally applies only to the organization’s five highest-compensated employees, and is based the aggregate of compensation paid by the filing organization and any related organizations. There is also a curious provision which appears to subject certain transportation fringe benefits provided by tax-exempt employers to tax at normal corporate tax rates, although the specific mechanism for the tax is unclear.

Also of particular interest in the tax-exempt sphere is an increase in the ceiling on the charitable contribution deduction for individuals, from 50% to 60% of the taxpayer’s contribution base. This would allow individuals to take a significantly larger deduction for gifts to charity, creating an opportunity for charities to offer even more tax benefits to their donors.

The Bill also features a loosening of the prohibition on political speech by churches. Statements made as part of a homily, sermon, or similar presentation “in the ordinary course of the organization’s regular and customary activities” and which do not create significant incremental expenses will not cause a church to lose its exempt status, even if those statements feature a political tone.

Other provisions relevant to tax-exempt organizations include a reduction of the private foundation excise tax from 2% to 1.4%, clarification of the status of certain organizations with respect to unrelated business income which are exempt under multiple code sections, and an exemption from excise tax for certain philanthropic holdings of private foundations. The Bill would also impose a private foundation-style excise tax on the investment income of private colleges and universities whose endowments average more than $100,000 per student.

All of the relevant provisions in the Tax Cuts & Jobs Act take effect for tax years beginning after December 31, 2017. This means that calendar year exempt organizations have less than two months to prepare for the impact these provisions would have. The Bill also features many more provisions that will impact taxable entities (including exempt organizations with unrelated trade or business income) including the elimination of the alternative minimum tax, the substantial removal of net operating loss carrybacks and a provision for unlimited net operating loss carryforwards, and the repeal of the deduction for local lobbying expenses. Look for an upcoming post that will dig into some of these provisions.

The Bill will be taken up by the Ways and Means Committee next week. House Republicans hope that the Bill will have passed the House by Thanksgiving. A Senate version is expected to be introduced sometime next week.

Johnson Lambert
Johnson Lambert | Author